The so-called “testing-the-waters” rule, which currently only applies to smaller firms preparing to go public, will now be extended to all prospective issuers hoping to gauge broader market interest before filing registration statements for initial public offerings (IPOs), the SEC said.

The move, which the agency’s commissioners unanimously voted to approve on Wednesday, is part of a broader push by SEC Chairman Jay Clayton to make it easier for companies to go public, amid worries that a 50 percent decline in U.S. listings over the past two decades is hurting investors.

“This benefits all investors - issuers can better identify information that is important to investors and enhance the ability to conduct a successful registered offering,” Clayton said in a statement.

C. Wallace DeWitt, senior counsel at Allen & Overy LLP said that expanding the ‘testing-the-waters’ coverage to all issuers made good sense.

“There is simply no reason to force issuers to fly blind while incurring the heavy costs associated with an offering,” he said, adding that it was heartening to see the Commission implementing recommendations in the Treasury’s October 2017 capital markets report - a checklist of how President Donald Trump’s administration would like to see the agency perform.

But not all market participants cheered the move.

“By the SEC’s own admission, it proposed and adopted the rule without any concrete understanding of whether it will actually promote capital formation or pose a threat to investors,” said Dennis Kelleher, President and Chief Executive Officer of Washington-based investor advocacy group Better Markets.

The markets regulator also unanimously voted on Thursday to ease its rules for approving low-risk exchange-traded funds (ETFs) in what could potentially be a major win for the $3.5 trillion market.

ETFs are hybrid investment products that trade on an exchange like a stock or closed-end fund.

The agency said the rule change would allow companies that sell ETFs to launch simple, straightforward funds without first seeking approval from the regulator, boosting competition and innovation.

Dozens of ETF companies currently operate under different requirements in a complex system they say has inadvertently allowed some firms to gain a competitive advantage.

There will be a one-year transition period for the amended rule.

“ETFs are one of the most successful and popular financial innovations in recent years, and the SEC’s new rule signifies an important step in the evolution of these funds,” said Paul Schott Stevens, President and CEO of the Washington-based Investment Company Institute.

(Published by Retuers, September 27 2019)
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