Testing the Waters: Early Look Meetings with Anchor Investors

Introduction

Test-the-waters meetings are confidential pre-launch conversations between issuers and qualified institutional investors that help calibrate pricing, refine the equity story, and identify anchor accounts before the formal roadshow begins. Originally created for emerging growth companies under the JOBS Act of 2012 and later extended to virtually all issuers under SEC Rule 163B, the TTW mechanism is now one of the most consequential pre-roadshow workstreams in any modern IPO. This article walks through what TTW actually is under securities law, how the meetings get used, and what the wall-crossing wrapper requires from the participating investors.

Test-the-waters (TTW) communications are a securities-law accommodation that lets an issuer and its underwriters discuss a contemplated public offering with qualified institutional buyers (QIBs) and institutional accredited investors (IAIs) before launching a formal roadshow, in some cases before any public filing. Under standard pre-launch securities law, any communication discussing an offering is a "prospectus" subject to Section 5 of the Securities Act, and pitching the deal informally before launch would violate gun-jumping rules. TTW carves out an explicit safe harbor from those restrictions for confidential pre-launch conversations with sophisticated institutional investors.

The Section 5(d) Origin

The JOBS Act of 2012 created Section 5(d) of the Securities Act, allowing emerging growth companies and their underwriters to hold TTW meetings with QIBs and IAIs at any time before or after filing a registration statement, including before any public submission. The reform reflected the policy view that pre-launch dialogue with sophisticated institutions improved deal pricing and reduced execution risk without harming retail investors.

The Rule 163B Expansion

In September 2019, the SEC adopted Rule 163B, extending TTW to issuers other than EGCs. After Rule 163B, virtually any issuer contemplating a registered offering can engage in TTW communications with QIBs and IAIs, putting all issuers on similar footing. The rule applies to common stock IPOs, follow-ons, convertibles, and any other registered offering format.

The Confidentiality Wrapper

Investors participating in TTW meetings sign a written confidentiality agreement (the "wall-crossing letter") promising to keep what they hear confidential, refrain from trading the issuer's securities until the deal launches publicly or they are formally released, and limit who at the institution sees the information. Compliance officers at the bank track every TTW meeting, log the names of the investors who attended, and monitor the wall-crossing release process.

Banks use TTW meetings for three specific purposes that show up consistently across deals.

Refining the Equity Story

The most common use is calibrating the equity story. Investors hear the story, ask questions, push back on the weakest claims, and identify which pillars resonate. The issuer and bankers use the feedback to refine the prospectus summary, the management presentation, and the talking points before launching the public roadshow. A story that lands well in TTW meetings translates into an oversubscribed book; a story that gets repeatedly questioned during TTW signals the working group needs to do more work.

Anchoring the Price Range

TTW meetings produce indicative price feedback that helps the bookrunner set the formal price range published with the public filing. Sophisticated investors will tell the bank what valuation level they would consider attractive, what level would make them pass, and what level would make them anchor with a large order. Aggregating that feedback across ten or fifteen TTW meetings gives the bookrunner a defensible view of where the range should sit.

Building the Anchor Investor List

For deals that include anchor or cornerstone investors (more common in Asia and Europe but increasingly used in US deals), TTW is the venue for identifying and securing anchor commitments. An investor who participates in a TTW meeting and indicates strong interest at a specific price level becomes a candidate for an anchor allocation when the deal launches.

Wall-Crossing Letter

The written confidentiality agreement an institutional investor signs before participating in a test-the-waters or other pre-launch confidential meeting. The letter binds the investor (and any colleagues who receive the confidential information) to confidentiality and to a trading restriction on the issuer's securities until the deal launches publicly or the bank formally releases the investor from the wall-crossing. The letter is a standard form maintained by the bookrunner's compliance team.

TTW is one of the highest-leverage pre-launch workstreams precisely because the feedback comes from accounts who will likely buy the deal at launch. Outside the formal TTW carve-out, what the issuer and underwriters can say is governed by the quiet period and gun-jumping rules, which is the next workstream the working group has to navigate.