Testing-the-waters materials: Overview, definition, and example
What are testing-the-waters materials?
Testing-the-waters materials are documents or communications used by companies to gauge interest from potential investors before formally launching an offering of securities, such as stocks or bonds. These materials allow businesses to assess whether there is sufficient demand for their offering without officially starting the process of selling securities or filing with the Securities and Exchange Commission (SEC).
These materials might include informal presentations, surveys, or other communications to potential investors. While they can help the company understand investor interest, they are not legally binding or considered a formal offering.
Why are testing-the-waters materials important?
Testing-the-waters materials are important because they help companies decide whether it’s worth proceeding with a full securities offering. By gathering feedback from investors early in the process, businesses can adjust their strategy, such as pricing or timing, to better meet market demands. It also helps reduce the risk of launching an offering that may not attract enough interest, which could be costly or damaging to the company’s reputation.
For investors, these materials provide early insights into new opportunities and help them assess whether they’d like to participate once the offering formally begins.
Understanding testing-the-waters materials through an example
Let’s say a startup tech company is considering launching an initial public offering (IPO) but wants to see if there’s enough interest from investors before proceeding. The company prepares a set of testing-the-waters materials, such as a presentation or brief overview of their business, and sends it to a select group of potential investors to gather feedback. Based on the responses, the company may decide to move forward with the IPO or adjust its approach before making the official offering.
In another example, a real estate development company might prepare testing-the-waters materials to gauge interest in a new investment project. They send out a survey to potential investors to determine if they’d be willing to invest in the project, which helps the company decide whether to move forward with the fundraising process.
An example of a testing-the-waters materials clause
Here’s how a clause about testing-the-waters materials might appear in a contract or offering document:
“The Company may distribute testing-the-waters materials to potential investors prior to filing a registration statement with the Securities and Exchange Commission, solely for the purpose of gauging investor interest in the proposed offering.”
Conclusion
Testing-the-waters materials are valuable tools for businesses looking to assess investor interest before committing to a full securities offering. They provide insight into market demand and help guide decisions about timing, pricing, and the structure of the offering. For investors, these materials offer an early look at potential opportunities, enabling informed decision-making.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.