The Securities and Exchange Commission wants to open the floodgates for companies looking to go public. Its strategy: Let more of them test the waters first.
The SEC proposed a new rule Tuesday allowing any company thinking about going public to gauge investor interest before filing for an initial public offering, The Wall Street Journal reports. Known as the "test-the-waters" rule, which was established under the 2012 JOBS Act, the provision lets companies engage in private discussions with institutions and accredited investors to evaluate market interest. Currently, only emerging growth companies--businesses with less than $1 billion in gross revenue--can make use of this provision prior to filing any paperwork. Firms with more revenue are barred from holding these conversations until the proper paperwork is submitted. The SEC is betting that more companies will go public if they can gauge investor interest first.
Unicorn startups like Airbnb, which reportedly pulled in between $3.5 billion and $4 billion in revenue last year, could benefit from the proposed rule. Airbnb is one of the most highly anticipated possible IPOs for 2019. Gauging market interest before committing to go public could help the company choose the right time for its IPO.
"Extending the test-the-waters reform to a broader range of issuers is designed to enhance their ability to conduct successful public securities offerings and lower their cost of capital, and ultimately to provide investors with more opportunities to invest in public companies," SEC chairman Jay Clayton said in a press release announcing the new rule.
Companies--no matter their size--can already file IPO paperwork confidentially, following a rule change in 2017. These changes expand on that decision.
In the past two decades, the number of public companies has dropped by roughly 50 percent, according to the WSJ report. At the same time, however, emerging growth companies made up roughly 86 percent of all IPOs between 2012 and 2017, according to data from the SEC. In that same time frame, the agency estimates that more than a third of them, or 35 percent, used the test-the-waters provision before going public.
"I have seen firsthand how the modernization reforms of the JOBS Act have helped companies and investors," said Clayton. "The proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering."
The public will have 60 days to submit comments to the SEC once the rule is published in the federal register, and then the commissioners will take a vote.