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In September 2019, the SEC expanded the scope of Testing the Waters meetings to all companies, from previously being limited to only Emerging Growth Companies.
Broadly speaking, Testing the Waters (TTW) meetings are designed to help inform a management team about whether they should endeavor to raise capital from the public equity markets. The process is designed to help a company conduct meetings with Qualified Institutional Buyers (QIB) and/or Institutional Accredited Investors (IAI). By meeting with QIBs and IAIs, the company can gather information about potential investor receptivity to the company as a public entity. Following a successful series of TTW meetings, a company will have a more informed view of the likely success of an IPO.
TTW meetings are designed to educate QIBs and IAIs about the company’s business, strategy, and basic financial profile. In return for educating potential investors, the company receives initial feedback from investors about the company’s relative investment attractiveness. Having an initial understanding of how the company is perceived is of tremendous value to the company and its underwriters as public equity financing decisions are contemplated.
This feedback loop from TTWs provides the company and its underwriters with an important perspective on a potential capital raising process. Through the TTWs, the company can learn about what resonates with investors, what additional information investors might need to make an investment decision, and how to improve the materials used in investor meetings. Often, the TTWs help inform management about how to articulate certain aspects of the business in a more investor friendly manner.
In the virtual world of 2020 and now 2021, the TTW process can be executed in a more efficient manner than was previously done with in-person meetings. As a result, more TTW meetings are conducted, which provides a more comprehensive feedback loop. Having held more meetings initially during TTWs, a company may find that the IPO roadshow is more efficient if TTW meetings have been held. The IPO roadshow becomes more of a conversation, rather than an education, about the business following TTWs, allowing investors to make more informed decisions on the IPO as a result of TTWs.
The goals for a successful TTW process are:
- Educate a wider audience of QIBs and IAIs about the company
- Gather feedback from investors about the investment merit of the company
- Utilize the TTW experience to improve messaging and materials for future meetings
- Prepare capital market participants about a potential public equity offering
Following a comprehensive TTW process, the company and the underwriters may look to accelerate anticipated timelines for a public equity offering. Conversely, the company may look to delay financing to incorporate the feedback from investors so as to better position the company for the eventual IPO. Either way, the education of the investment community and the feedback loop the TTW process provides can be instrumental in helping to execute a successful IPO.
To learn about Gilmartin and how we strategically partner with our clients, contact our team today.
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David Deuchler, CFA, Managing Director
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