What Founders Must Know on Testing-the-Waters Meetings Pre-IPO

“Testing-the-waters” meetings serve a critical role in the initial public offering process. During these meetings, management offers an overview of its business, explains why the company is interesting and attractive, and discusses its growth story to prospective investors.

The use of TTW has become ubiquitous and crucial to IPOs. Below are several practical considerations relating to TTW meetings that could surprise management, founders, and sponsors.

TTW meetings occur during the pre-filing period, including before a company confidentially submits its registration statement, the waiting period, and until an undefined period preceding the commencement of the IPO roadshow. The waiting period between the end of TTW meetings and the commencement of the IPO roadshow is a gray area and is subject to bank policies and judgment.

TTW communications allow companies, founders and sponsors to confidentially assess investor interest in a potential IPO. By gauging investor appetite through TTW meetings, management reduces the likelihood of unexpected outcomes or a failed IPO. Pre-IPO interactions also can help management sharpen its equity story to better resonate with investors.

In 2012, then-President Barack Obama signed the JOBS Act, which was designed to facilitate capital formation by allowing certain pre-IPO communications with potential investors. Originally available only to “emerging growth companies,” the Securities and Exchange Commission subsequently adopted rules expanding the availability of TTW communications to all companies.

Don’t be caught by surprise or underestimate the implications of conducting TTW meetings. It isn’t just the preseason; people are keeping score.

Setting Up Meetings

A company works with investment bankers to host TTW meetings. Not every investor is eligible to participate—only “qualified institutional buyers” and institutional “accredited investors” can. In advance of meetings, investment bankers require the adoption of guidelines setting forth the rules of the road.

TTW guidelines keep the company in compliance with the securities rules and investment bank practices. The guidelines limit the number of participants, create an invitation process, and establish an approval procedure for TTW materials. Executives involved in the TTW process should review the guidelines to avoid surprises.

Keep in mind that leaks happen. The greater the investor outreach, the greater chance your potential IPO will appear in the financial press.

Limitations on Content

Material information included in a TTW communication must be included in or derivable from the information included in the company’s prospectus filed with the SEC.

Information in a TTW communication can be used before it’s included in a prospectus. This is a critical point that creates issues in many transactions: By including information, the company may become obligated to include it in its prospectus prior to conducting its IPO. The information in the TTW materials need not exactly tie to the prospectus, but the information must be consistent.

Statements in TTW communications also constitute an “offer” for securities and therefore create liability. Ensure the information is factually accurate and supportable.

Underwriters’ counsel will require fact support for statements included in the IPO prospectus, and it’s a good idea to provide supporting documentation for the TTW materials as well. This is important since material information in the TTW will need to be included in your prospectus filings.

Cohesive Storytelling

A company must tell a cohesive story throughout the IPO process and share it with research analysts, TTW participants, and investors during the IPO roadshow process. On occasion, investment bankers and management seek to present information in TTW meetings that can be problematic when included in a prospectus. For example, certain financial information when translated into the prospectus may be inconsistent with auditor comfort procedures.

Additionally, certain non-GAAP presentations in TTW communications may draw SEC scrutiny. Before using TTW communications, the company’s securities counsel should review the materials. Pre-clear the financial information with the accountants to confirm there are no issues with the comfort letter process.

If the information can’t be comforted, determine whether the investment banks can get comfortable with the presentation in other ways—there are creative solutions.

Unexpected Publicity

Consider the interplay of TTW communications with information the company provides to others. If the company has syndicated bank debt or bonds, a TTW communication can offer the meeting participants an informational trading advantage with respect to such instruments. For example, during a TTW meeting, an investor might learn financial information or corporate news about a company.

Participants often view meetings as an indication of a future deleveraging event. New information may drive participants to transact in the company’s instruments. The banks therefore will likely push for cleansing information in a lender or bondholder portal or a press release.

Cleansing information may require the off-cycle dissemination of financial data, but it also could include a notice that the company is contemplating an IPO. Consider whether the introduction of this information is problematic before conducting TTW meetings.

A company may not want to share certain information in TTW materials for a host of reasons, including that information may be leaked to media or Wall Street, and that IPOs can be challenging to execute. If news of a potential IPO is public and no IPO occurs, investors may unfairly assume there is an issue with the company. So, pre-clear with the investment bank and company counsel whether cleansing activities will be necessary and understand the scope of such disclosures.

Cleansing information may require the off-cycle dissemination of financial data, but it could also include a notice that the company is contemplating an IPO. Consider whether the introduction of this information is problematic before conducting TTW meetings.

A company may not want to share certain information in TTW materials for a host of reasons, including that information may be leaked to media or Wall Street, and that IPOs can be challenging to execute. If news of a potential IPO is public and no IPO occurs, investors may unfairly assume there is an issue with the company. So, pre-clear with the investment bank and company counsel whether cleansing activities will be necessary and understand the scope of such disclosures.

SEC Requests

When a company submits or files its prospectus with the SEC, the agency may request copies of TTW materials. The SEC has the right to review and comment on materials and may compare these presentations with the information included in the prospectus. Although TTW materials don’t become public, any discrepancies with public offering materials may draw SEC scrutiny.

TTW meetings offer tremendous benefits, but companies should prepare with counsel to avoid surprises that could be damaging or problematic for management.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Craig Garvey is partner at McDermott Will & Schulte and has extensive experience providing counsel to publicly traded companies and leading various capital markets transactions for public and private companies.

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