Home > Division of Securities > Publications > Testing the Waters

Testing the Waters - Solicitation of Interest

Testing the Waters is a procedure that was created by the Securities Division to assist small business in raising capital. This procedure permits a small business issuer to solicit indications of interest in a proposed securities offering prior to the preparation and filing of a final prospectus.

The purpose of the process is two-fold. One is to allow small business issuers to determine whether there is a reasonable probability of success prior to incurring the often considerable expense of registering an offering. The second is that the probability of success can be greatly increased if the issuer is permitted to publicly solicit input on how to structure the offering to make it attractive to a sufficient number of investors.

The company must intend to register in this state and intend to utilize either Regulation A, Rule 147 or Rule 504 at the federal level. This procedure allows for offers only. Sales can only be made after the securities are registered in this state.

There are certain very specific, detailed steps that the issuer must follow. Any offer that fails to conform to the conditions of the TTW procedure may constitute an unregistered, unlawful offer for which civil and administrative liabilities may attach under the Securities Act.

It is also very important to consider that because these offers involve a public solicitation, an issuer cannot avail itself of this process and then decide to take advantage of certain private placement exemptions. Most private offerings must wait until six months after the last solicitation of interest.

Certain types of businesses may not utilize this process. If the issuer is engaged in the business of petroleum exploration or production or mining or any other extractive industry, this process is not available. Holding companies, or companies whose principal purpose is owning stock or in supervising the management of other companies, portfolio companies, issuers with complex capital structures, commodity pools, equipment leasing programs and real estate programs may not take advantage of this procedure if the issuer is going to utilize the Form U-7 to register.

There are certain potential issuers who are ineligible to use this process. The issuer is ineligible if it or any of officers, directors, or ten percent shareholders or promoters: (1) has filed a registration statement which is the subject of a currently effective registration stop order entered pursuant to any federal or state securities law within five years prior to the filing; (2) has been convicted within five years prior to the filing of any felony or misdemeanor in connection with the offer, purchase or sale of any security or any felony involving fraud or deceit; (3) is subject to any federal or state administrative enforcement order or judgment entered by any state securities administrator or the Securities and Exchange Commission within five years prior to the filing; or (4) is subject to any order, judgment, or decree of any court of competent jurisdiction temporarily, preliminarily, or permanently restraining or enjoining such party from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security or involving the making of any false filing with the state entered within five years prior to the filing.

The Solicitation of Interest Form sets forth the minimum information required for soliciting indications of interest. Additional information may be included if desirable. The graphic presentation of the form may be altered as long as the minimum information is clearly presented.

NOTE: It is important to be aware that all information given to the potential investor must be accurate. Any investor who receives a material misstatement or omission, whether written or oral, during the Solicitation of Interest process may later have a cause of action under the Securities Act.

The following steps are required:

Ten (10) business days prior to the initial solicitation of interest, the potential issuer must file with the Administrator an application of intent to register the securities under RCW 21.20.180 or RCW 21.20.210 on Form U-1 and a filing fee of $100, along with the Solicitation of Interest Form and any other materials to be used to conduct the solicitations of interest, including, but not limited to, the script of any broadcast to be made and a copy of any notice or advertisement to be published.
Five (5) days prior to utilizing any materials not previously filed with the initial solicitation of interest documents or amendments thereto, the potential issuer must file with the Administrator amendments to materials already filed or additional materials to be used to conduct solicitations of interest. Materials provided to a particular investor upon request by that investor do not need to be filed.
The potential issuer must then wait until it receives a limited permit to solicit indications of interest. No Solicitation of Interest Form, script, advertisement or other material can be used to solicit indications of interest unless approved by the Administrator.
Except for scripted broadcasts and published notices, there can be no communication with any prospective investor about the contemplated offering unless the investor is provided with the most current Solicitation of Interest Form at or before the time of the communication or within five (5) days thereafter. During the solicitation of interest period, there can be no solicitation of money or any type of commitment to purchase.
The issuer or promoter on whose behalf indications of interest are solicited must file a post solicitation report three months after the commencement of the solicitation, and each three months thereafter until the solicitation is completed.
If the potential issuer decides to go forward with the offering, the registration must be completed. Once the registration is filed, the solicitation of indications of interest must cease. A sale may not be made until at least twenty (20) calendar days after the last solicitation of interest. In addition, no sale can be made until seven (7) days after delivery to the purchaser of a final offering circular that has been approved by the Administrator.

Anyone relying on this procedure should be aware that all representations made to potential investors, whether oral or written, are subject to the anti-fraud section of the Securities Act. Any material misrepresentation or omission may give rise to civil, criminal, or administrative liability. A subsequent registration does not "cure" a previous unlawful offer. Only a rescission offer made in accordance with the Securities Act can accomplish such a "cure".

TESTING THE WATERS IN THE STATE OF WASHINGTON

Procedure for Solicitation of Indications of Interest
prior to the filing of a registration statement

An offer, but not a sale, of a security made by or on behalf of an issuer for the sole purpose of soliciting an indication of interest in receiving an offering circular for such security may be made in conjunction with a filing under RCW 21.20.180 or RCW 21.20.210 if all of the following conditions are satisfied:

The issuer is or will be a business entity organized under the laws of one of the states or possessions of the United States or one of the provinces or territories of Canada, is engaged in or proposes to engage in a business other than petroleum exploration or production or mining or other extractive industries and is not a "blind pool" offering or other offering for which the specific business or properties cannot now be described.

The offeror files an application under RCW 21.20.210 or RCW 21.20.180 with intent to complete a registration in this state and intends to conduct its offering pursuant to either Regulation A or Rule 504 of Regulation D or Rule 147, as promulgated by the Securities and Exchange Commission.
Ten (10) business days prior to the initial solicitation of interest under this rule, the offeror files with the Administrator an application to register the securities (Form U-1) and a filing fee of $100, along with the Solicitation of Interest Form and any other materials to be used to conduct the solicitations of interest, including, but not limited to, the script of any broadcast to be made and a copy of any notice to be published.
Five (5) days prior to usage, the offeror files with the Administrator any amendments to the foregoing materials or additional materials to be used to conduct solicitations of interest, except for materials provided to a particular investor pursuant to a request by that investor. (Issuers should be aware that some requested information such as projections may not be appropriate for viewing by potential investors. Care should be exercised when providing information that has not been previously filed to insure that it is factual and does not constitute a material misstatement or omission.)
No Solicitation of Interest Form, script, advertisement or other material can be used to solicit indications of interest unless approved by the Administrator.
Except for scripted broadcasts and published notices, the offeror does not communicate with any offeree about the contemplated offering unless the offeree is provided with the most current Solicitation of Interest Form at or before the time of the communication or within five (5) days from the communication.
During the solicitation of interest period, the offeror does not solicit or accept money or a commitment to purchase securities.
No sale is made until seven (7) days after delivery to the purchaser of a final offering circular or in those instances in which delivery of a preliminary offering circular is allowed, a preliminary offering circular.
The offeror does not know, and in the exercise of reasonable care, could not know that the issuer or any of the issuer's officers, directors, ten percent shareholders or promoters:

Has filed a registration statement which is the subject of a currently effective registration stop order entered pursuant to any federal or state securities law within five years prior to the filing of the Solicitation of Interest Form.
Has been convicted within five years prior to the filing of the Solicitation of interest Form of any felony or misdemeanor in connection with the offer, purchase or sale of any security or any felony involving fraud or deceit, including, but not limited to, forgery, embezzlement, obtaining money under false pretenses, larceny, or conspiracy to defraud.

Is currently subject to any federal or state administrative enforcement order or judgment entered by any state securities administrator or the Securities and Exchange Commission within five years prior to the filing of the Solicitation of Interest Form or is subject to any federal or state administrative enforcement order or judgment entered within five years prior to the filing of the Solicitation of Interest Form in which fraud or deceit, including, but not limited to, making untrue statements of material facts and omitting to state material facts, was found.

Is subject to any federal or state administrative enforcement order or judgment which prohibits, denies, or revokes the use of any exemption from registration in connection with the offer, purchase or sale of securities.

Is currently subject to any order, judgment, or decree of any court of competent jurisdiction temporarily or preliminarily restraining or enjoining, or is subject to any order, judgment or decree of any court of competent jurisdiction, permanently restraining or enjoining, such party from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security or involving the making of any false filing with the state entered within five years prior to the filing of the Solicitation of Interest Form.

The prohibitions listed above shall not apply if the person subject to the disqualification is duly licensed or registered to conduct securities related business in the state in which the administrative order or judgment was entered against such person or if the broker-dealer employing such party is licensed or registered in this state and the Form BD filed with this state discloses the order, conviction, judgment or decree relating to such person. No person disqualified under this subsection may act in a capacity other than that for which the person is licensed or registered. Any disqualification caused by this section is automatically waived if the agency which created the basis for disqualification determines upon a showing of good cause that it is not necessary under the circumstances that the solicitation of interest registration be denied.

The offeror shall comply with the requirements set forth below. Failure to comply will result in a violation of the Act, and action may be taken by the Administrator under RCW 21.20.390 and also may constitute grounds for denying registration under RCW 21.20.280.
- Any published notice or script for broadcast, must contain at least the identity of the chief executive officer of the issuer, a brief and general description of its business and products, and the following legends:
- No money or other consideration is being solicited and none will be accepted;
- No sales of the securities will be made or commitment to purchase accepted until delivery of an offering circular that includes complete information about the issuer and the offering;
- An indication of interest made by a prospective investor involves no obligation or commitment of any kind; and,
- This offer is being made pursuant to the requirements of federal and state securities laws. Neither the federal nor the state authorities have confirmed the accuracy or determined the adequacy of this document or any other document presented to you in connection with this offer. No sale may be made until the offering statement is qualified by the Securities and Exchange Commission if made pursuant to Regulation A and is registered in this state.

All communications with prospective investors made in reliance on this procedure must cease after documents to complete registration are filed in this state, and no sale may be made until at least twenty (20) calendar days after the last communication made in reliance on this process.
A preliminary offering circular may only be used in connection with an offering for which indications of interest have been solicited under this rule if the offering is conducted by a registered broker-dealer and it is qualified as a Regulation A at the federal level.

The Administrator may waive any condition of this procedure upon application by the offeror and good cause having been shown. Neither compliance nor attempted compliance with this procedure, nor the absence of any objection or order by the Administrator with respect to any offer of securities undertaken pursuant to this process, shall be deemed to be a waiver of any condition or deemed to be a confirmation by the Administrator of the availability of this procedure.

Offers made in reliance on this process will not result in a violation of RCW 21.20.010 by virtue of being integrated with subsequent offers or sales of securities unless such subsequent offers and sales would be integrated under federal securities laws.

Issuers on whose behalf indications of interest are solicited under this procedure may not make offers or sales in reliance on RCW 21.20.320(1), WAC 460-44A-504 and WAC 460-44A-506 promulgated under RCW 21.20.320(9), or WAC 460-44A-505 promulgated under RCW 21.20.320(17) until six (6) months after the last communication with a prospective investor made pursuant to this rule.

The issuer or promoter on whose behalf indications of interest are solicited must file a Post Solicitation Report every three months after the commencement of the solicitation, and each three months thereafter until the solicitation is completed.

COMMENTS:

All communications made in reliance on this procedure are subject to the anti-fraud provisions of this Act.

The Administrator may or may not review the materials filed pursuant to this procedure. Materials filed, if reviewed, will be judged under anti-fraud principles. Any discussion in the offering documents of the potential rewards of the investment must be balanced by a discussion of possible risks.

Any offer effected in violation of this procedure may constitute an unlawful offer of an unregistered security for which civil liability attaches under RCW 21.20.430. Likewise any misrepresentation or omission may give rise to civil liability. Under the Securities Act a subsequent registration of the security for the sale of the security does not "cure" the previous unlawful offer. Only a rescission offer made in accordance with the provisions of the Act can accomplish such a "cure".