How to Conduct Pre-IPO Investor Testing: Compliant Operation of Testing-the-Waters Meetings

The SEC’s Division of Corporation Finance processed 147 draft registration statement submissions from non-US issuers in the fiscal year ending September 2024, up 23% from 119 in FY2023, according to the agency’s annual filing statistics. This surge in confidential submissions, driven largely by Hong Kong and PRC-based companies exploring NASDAQ and NYSE listings, has made the pre-filing “testing-the-waters” (TTW) meeting a standard, not exceptional, step in the US IPO process. For issuers and their sponsor banks, the operational challenge is no longer whether to conduct TTW meetings, but how to execute them without creating a de facto public offering under Section 5 of the Securities Act of 1933. The SEC’s 2012 JOBS Act framework, expanded to all issuers via the 2019 FAST Act amendments, permits oral communications with qualified institutional buyers (QIBs) and institutional accredited investors (IAIs) before a registration statement is filed. However, the line between permissible gauging of investor appetite and illegal gun-jumping remains defined by a narrow set of procedural safeguards. This article dissects the compliant operation of TTW meetings for Hong Kong-headquartered issuers, focusing on the regulatory mechanics, documentation controls, and the specific liability risks that differ from the HKEX pre-deal research regime under the SFC’s Code of Conduct.

The Regulatory Architecture: JOBS Act, FAST Act, and the SEC’s No-Action Framework

The foundation for TTW meetings rests on Section 5(d) of the Securities Act, added by the JOBS Act of 2012 for emerging growth companies (EGCs) and extended to all issuers by the FAST Act of 2019. Section 5(d) permits an issuer, or any person authorized to act on its behalf, to communicate orally with QIBs and IAIs to determine whether such investors have an interest in a contemplated securities offering. The SEC’s Division of Corporation Finance provided interpretive guidance in its 2019 FAST Act Compliance and Disclosure Interpretations (C&DIs), clarifying that written communications during TTW meetings must be filed as part of the registration statement or as a separate filing under Rule 425 if the communication constitutes a free-writing prospectus (FWP). The critical distinction is that oral communications are exempt from filing; written materials are not.

Defining the Eligible Audience: QIBs and IAIs Only

The SEC’s definition of QIBs under Rule 144A(a)(1) of the Securities Act requires institutions that own and invest on a discretionary basis at least USD 100 million in securities. For IAIs, the threshold under Rule 501(a)(1) of Regulation D is USD 5 million in assets for natural persons and USD 5 million for entities not formed for the specific purpose of acquiring the securities offered. Hong Kong-based fund managers and family offices must demonstrate compliance with these thresholds to the issuer’s legal counsel before any TTW meeting proceeds. In practice, US counsel prepares a QIB/IAI certification letter that the investor must sign before the meeting. The SEC’s 2019 C&DIs (Question 133.01) explicitly state that the issuer must have a reasonable belief that the investor meets the eligibility criteria; reliance on a signed representation letter satisfies this standard.

The Oral-Only Rule and Written Material Prohibitions

The single most common compliance failure in TTW meetings is the distribution of written materials—even a one-page summary of key financial metrics—to investors before the registration statement is filed. The SEC’s Section 5(d) exemption applies only to oral communications. Any written communication, including a PowerPoint deck, a term sheet, or an email summarizing the company’s story, becomes a prospectus subject to Section 5(b)(1) and must be filed with the SEC. The SEC’s 2011 Skadden Arps No-Action Letter (available at the SEC’s Division of Corporation Finance website) established that a “written communication” includes any communication that is reduced to writing, including electronic messages. For Hong Kong issuers accustomed to the HKEX’s pre-deal research regime—where sponsor banks can distribute research reports to selected investors under the SFC’s Code of Conduct paragraph 16.5—the US regime is materially more restrictive. In Hong Kong, the SFC allows pre-deal research under specific conditions, including a blackout period and disclosure requirements. In the US, no such research distribution is permitted until the registration statement is declared effective.

Operational Mechanics: Structuring the TTW Roadshow

A compliant TTW roadshow for a Hong Kong issuer targeting a NASDAQ listing typically spans two to three weeks and involves 15 to 25 institutional investor meetings. The issuer’s management team—usually the CEO, CFO, and in some cases the head of investor relations—presents a prepared oral narrative covering the business model, industry positioning, growth strategy, and high-level financial trends. The presentation must avoid any discussion of the offering’s size, price range, or timing, as these would constitute an offer of securities under Section 2(a)(3) of the Securities Act.

Script Controls and the “Talking Points” Approach

US counsel typically prepares a script or detailed talking points for management, which is reviewed for compliance with Section 5(d) and Rule 135 (pre-filing announcements). The script should avoid forward-looking statements that could be construed as projections, such as specific revenue guidance or EBITDA margin targets for future fiscal years. The SEC’s 2019 C&DIs (Question 133.05) confirm that an issuer may discuss its business plans and general market conditions, but any statement that could be interpreted as a forecast of the offering’s success or pricing is impermissible. In practice, counsel instructs management to use phrases like “we are exploring a potential IPO” and “we cannot discuss any specifics of the offering at this time.” This is analogous to the HKEX’s “pre-IPO consultation” process under Listing Rule 9.11, where the Exchange reviews draft prospectuses but does not permit public distribution of offering materials before formal filing.

Documentation and the “Tear Sheet” Prohibition

A common operational error by Hong Kong issuers is the preparation of a “tear sheet” or “fact sheet” summarizing key financial data—revenue, net income, gross margin—for distribution at TTW meetings. This is expressly prohibited under the SEC’s Section 5(d) framework. Any financial data presented orally must be derived from the issuer’s publicly available financial statements (if any) or from internal management accounts that are not shared in written form. If the issuer has not previously filed financial statements with the SEC, the oral presentation may reference the company’s historical revenue growth trajectory and profitability trends, but cannot provide specific line-item figures in writing. The SEC’s 2017 Staff Legal Bulletin No. 14 (SLB 14) reiterated that oral communications are not subject to the same liability standards as written prospectuses under Section 12(a)(2) of the Securities Act, but cautioned that false or misleading oral statements could still be actionable under Rule 10b-5 of the Securities Exchange Act of 1934.

Liability Considerations: The SEC’s Enforcement Focus on Pre-Filing Communications

The SEC’s Division of Enforcement has increased scrutiny of pre-filing communications, particularly for non-US issuers. In FY2024, the SEC brought 12 enforcement actions related to gun-jumping violations, up from 7 in FY2023, according to the SEC’s FY2024 Annual Enforcement Report. While the majority of these actions involved domestic issuers, the SEC’s 2023 action against a PRC-based biotechnology company (SEC Administrative Proceeding File No. 3-21567) highlighted the risk for Hong Kong issuers. The company had distributed a written summary of its clinical trial results to QIBs during TTW meetings before filing its registration statement. The SEC imposed a USD 500,000 penalty and required the company to cease using the written materials.

Section 5 Liability vs. Section 12(a)(2) Liability

Section 5 of the Securities Act imposes strict liability for any offer or sale of securities without an effective registration statement. A violation of Section 5 does not require proof of scienter or negligence; the mere fact of an unauthorized offer is sufficient. This means that an issuer that distributes a written summary during a TTW meeting—even if the summary is accurate and not misleading—has committed a Section 5 violation. The SEC can seek injunctive relief, disgorgement of profits, and civil penalties. In contrast, Section 12(a)(2) liability applies to prospectuses and oral communications that contain material misstatements or omissions. For TTW meetings conducted orally, the issuer faces Section 12(a)(2) exposure only if the oral statements are materially false or misleading. The practical implication is that issuers must prioritize the form of communication (oral vs. written) over the content’s accuracy, because written communications carry a higher strict liability risk.

The Role of Underwriter Counsel and the “Wall Crossing” Mechanism

US underwriters typically require the issuer to execute a “wall crossing” agreement before any TTW meeting. This agreement acknowledges that the investor has received material non-public information (MNPI) about the issuer and agrees not to trade in the issuer’s securities until the information is publicly disclosed. The wall crossing mechanism is analogous to the HKEX’s “pre-IPO placement” rules under Listing Rule 10.05, which require that placees in a pre-IPO placement sign a lock-up agreement and acknowledge receipt of inside information. For Hong Kong issuers, the wall crossing agreement must be drafted to comply with both US securities laws and the SFC’s Code of Conduct on inside information disclosure under Part XIVA of the Securities and Futures Ordinance (Cap. 571). The SFC’s 2022 Guidance on Pre-IPO Placements (SFC Circular dated 15 March 2022) requires that any investor receiving MNPI in connection with a pre-IPO placement must be informed in writing that the information is confidential and that trading while in possession of such information may constitute insider dealing under Section 291 of the SFO.

Practical Compliance Checklist for Hong Kong Issuers

Based on the regulatory framework and enforcement trends, Hong Kong issuers preparing for a US IPO should operationalize the following controls.

Pre-Meeting Documentation and Investor Screening

Each TTW meeting must be preceded by the investor’s execution of a QIB/IAI certification letter and a wall crossing agreement. The issuer’s US counsel should maintain a log of all investors contacted, the date of the meeting, and the form of communication used. The SEC’s 2019 C&DIs (Question 133.03) require that the issuer retain records of the oral communications, though the SEC does not mandate audio recordings. In practice, counsel prepares a written summary of each meeting’s discussion points, which is retained in the offering binder.

Management Training and Script Adherence

The issuer’s management team must undergo a TTW-specific training session conducted by US counsel. The training should cover: (1) the prohibition on distributing written materials; (2) the prohibition on discussing offering size, price, or timing; (3) the requirement to use only pre-approved talking points; and (4) the procedure for handling investor questions that touch on offering specifics. The SFC’s Code of Conduct paragraph 16.5, which governs pre-deal research in Hong Kong, does not apply to US TTW meetings, but the training should address the differences between the two regimes to avoid confusion.

Post-Meeting Follow-Up and the “Quiet Period” Principle

After the TTW roadshow concludes, the issuer must not engage in any further communications with the contacted investors until the registration statement is publicly filed. The SEC’s “quiet period” under Rule 135 does not formally commence until the registration statement is filed, but any follow-up communication that could be construed as an offer—such as a thank-you email that includes a summary of the company’s prospects—would violate Section 5. The issuer’s legal counsel should issue a written reminder to all management and advisors prohibiting any post-meeting contact with TTW participants until the filing date.

Actionable Takeaways

1. All TTW meetings must be conducted exclusively through oral communications, with no written materials—including tear sheets, PowerPoint decks, or email summaries—distributed to investors before the registration statement is filed, as the SEC’s Section 5(d) exemption covers only oral communications and any written communication constitutes a prospectus subject to filing requirements.
2. Each investor must execute a QIB/IAI certification letter and a wall crossing agreement before the meeting, with the issuer’s US counsel maintaining a log of all participants and the date of each meeting to demonstrate compliance with the SEC’s 2019 C&DIs.
3. Management must adhere to pre-approved talking points that avoid any discussion of the offering’s size, price range, or timing, as such statements would constitute an offer under Section 2(a)(3) of the Securities Act and expose the issuer to strict Section 5 liability.
4. Hong Kong issuers must reconcile the US TTW framework with the SFC’s Code of Conduct on inside information disclosure under Part XIVA of the SFO, ensuring that wall crossing agreements comply with both US securities laws and Hong Kong’s insider dealing prohibitions under Section 291 of the SFO.
5. Post-meeting communications with TTW participants must cease entirely until the registration statement is publicly filed, as any follow-up contact—even a thank-you email—could be construed as an offer in violation of Section 5 of the Securities Act.