Testing the Waters Under Regulation A+: Rule 255 Explained

Testing the waters is the practice of communicating with potential investors to find out whether there is interest in a securities offering before the company commits to the cost of completing it. In Regulation A, the practice is permitted by Rule 255, which allows an issuer, or someone authorized to act for it, to solicit indications of interest orally or in writing at any time before the offering statement is qualified, including before the offering statement is publicly filed or even submitted for non-public review. The communications must carry specific statements, no money can be taken, and the antifraud rules apply. This guide explains what testing the waters under Regulation A+ allows, the conditions in Rule 255, how it fits into the offering timeline and where the risks lie.

This is general information and not legal advice. The rule text on the eCFR and the SEC’s Regulation A guidance control, and issuers should have counsel review any testing-the-waters materials before they go out.

In brief

Rule 255 allows solicitations of interest before qualification, including before any filing with the SEC.
The communications must say that no money or commitment is being solicited, that no sale can occur and no offer can be accepted until qualification, and that an indication of interest creates no obligation.
Testing-the-waters materials are treated as offers for the purposes of the antifraud provisions.
After the offering statement is publicly filed, additional conditions apply, including making the preliminary offering circular available.
The materials are filed as an exhibit to the offering statement, according to the SEC’s guidance.

Why testing the waters matters

Preparing an offering statement requires audited financials for Tier 2, legal work and time. A company that tests the waters can find out whether investors might respond to its story, price range and structure before it spends that money, or while its filing is under review. The SEC’s guidance describes this as the ability to “test the waters” with, or solicit interest from, the general public either before or after filing the offering statement, subject to the rule’s legends and conditions.

This guide covers only the Regulation A rule.

What Rule 255 permits

Rule 255(a) states that at any time before qualification of an offering statement, including before the non-public submission or public filing, an issuer or any person authorized to act on its behalf may communicate orally or in writing to determine whether there is interest in a contemplated offering. Three points follow from the text:

The audience can be broad. The rule does not limit solicitations to particular types of investors, unlike private placement rules that restrict general solicitation. The SEC describes the permitted audience as including the general public.
The medium is flexible. Oral and written communications both qualify, and written ones may include a way for a person to indicate interest, such as a response form. The issuer may require name, address, telephone number or email address in such a form (Rule 255(c)).
The communications are offers for antifraud purposes. Rule 255(a) says they are deemed to be offers of a security for sale for purposes of the antifraud provisions of the federal securities laws. A misleading statement can create liability even though no sale occurs.

The required statements

Rule 255(b) requires each communication to state that:

No money or other consideration is being solicited, and if sent in response, will not be accepted.
No offer to buy the securities can be accepted and no part of the purchase price can be received until the offering statement is qualified, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time before notice of its acceptance given after the qualification date.
A person’s indication of interest involves no obligation or commitment of any kind.

These are the core legends. Many issuers place them in a prominent location in every piece, whether a web page, email, social media post, video or slide deck.

Additional conditions after public filing

Once the offering statement has been publicly filed, Rule 255(b)(4) adds a requirement that the materials do one of three things:

State from whom a copy of the most recent Preliminary Offering Circular may be obtained, including a phone number and address.
Provide the URL where the Preliminary Offering Circular, or the offering statement that contains it, may be obtained.
Include a complete copy of the Preliminary Offering Circular.

If materials are used after public filing and contain information that is inaccurate or inadequate in any material respect, Rule 255(d) requires the issuer to redistribute revised materials in a substantially similar manner. There is a narrow exception where the only problem is in a Preliminary Offering Circular that is provided or linked, in which case recirculation may not be required in the circumstances the rule describes.

No money, no commitment

The rule’s central limit is that no solicitation or acceptance of money or other consideration, nor of any commitment, binding or otherwise, is permitted until qualification (Rule 255(a)). Practically:

Do not set up payment links, deposit forms or reservation fees for the offering.
Do not accept signed subscription agreements.
Treat “reservation” language carefully. An expression of interest is allowed; a binding reservation is not.

Rule 251(d)(2)(i) separately prohibits any sale until the offering statement has been qualified. Rule 251(d)(1) permits offers after filing in the forms described in Rules 254 and 255, and oral offers.

How it fits in the offering timeline

Before any filing. Rule 255 materials can be used to gauge interest. The issuer does not yet have an offering statement to show, so the materials usually rely on a short description of the business and the contemplated offering.
During non-public review. An issuer that submits a draft offering statement for non-public staff review may continue to test the waters under Rule 255, since the rule applies at any time before qualification.
After public filing. The materials must connect to the Preliminary Offering Circular as described above. The issuer may also make written offers using a Preliminary Offering Circular that meets Rule 254.
At qualification. Once the SEC qualifies the offering statement, sales may begin, and testing-the-waters materials are superseded by the final offering circular.

Our guide on how Regulation A works from Form 1-A to qualification describes the stages in more detail.

Filing testing-the-waters materials

Part III of Form 1-A calls for exhibits to the offering statement. The SEC’s guidance lists “testing the waters” materials among the required exhibits. In practice, an issuer files the materials it used, and counsel reconciles the filing with the content of the offering circular. If the materials include statements that differ from the offering circular, the issuer should be prepared to explain them to the staff.

The 48-hour delivery rule

For issuers that are not currently required to file reports under Rule 257(b), Rule 251(d)(2)(i)(B) requires that a Preliminary Offering Circular be delivered at least 48 hours before the sale to any person who, before qualification, indicated an interest in purchasing securities in the offering, including persons who responded to the issuer’s solicitation of interest materials. This links testing the waters to the sale process: a person who responded to a Rule 255 communication must receive the preliminary circular before a sale to them.

Risks and best practices

Counsel and issuers commonly pay attention to these points:

Consistency. What the testing-the-waters materials say about the business, risks, valuation and plans should match the offering circular. Inconsistencies create antifraud risk and staff comments.
Forward-looking claims. Projections, return claims and promises of listing are sensitive. Include risk language and avoid guarantees.
Third-party promotion. Rule 255 covers communications by the issuer or a person authorized to act on its behalf. If promoters, influencers or platforms distribute the materials, counsel should consider whether they are acting on the issuer’s behalf and what they are saying.
Records. Keep copies of every version, date, audience and channel used, since the staff may ask and the issuer may need to file or revise them.
Broker-dealer rules. If securities professionals help gather indications of interest, broker-dealer registration and FINRA rules may apply to them.
State law. The offering may be subject to state securities law in some cases, such as Tier 1 offerings that require state qualification. Consider state requirements in each place where communications are directed.
Platform rules. Social media and advertising platforms often have their own policies on financial offerings.

A worked example, with made-up facts

A fictional craft brewery is considering a Tier 2 offering. It sets up a landing page that describes its business and says it is “considering” an offering of common stock. The page includes the Rule 255(b) statements: no money is being solicited, no offer can be accepted before qualification, and indicating interest creates no obligation. A form collects names and email addresses. It does not take payments.

Two months later, the brewery publicly files Form 1-A. It updates the page to include a link to the Preliminary Offering Circular on EDGAR. Several people who signed up before qualification later decide to invest. Before accepting their subscriptions, the brewery delivers the Preliminary Offering Circular at least 48 hours before the sale, because it is not a reporting company and these people indicated interest before qualification. Once the offering statement is qualified, it sends the final offering circular or a notice with its URL within two business days after each sale is completed.

Common misconceptions

“Testing the waters is a way to raise money early.” No money or commitments can be accepted before qualification.
“It is not an offer, so the antifraud rules do not apply.” Rule 255(a) deems these communications offers for antifraud purposes.
“The legends are optional if the page is small.” The statements in Rule 255(b) are conditions of the rule.
“Once the offering statement is filed, I can keep using old materials.” After public filing, the materials must meet the additional Rule 255(b)(4) conditions, and inaccurate materials must be revised and redistributed.
“It works the same in all exemptions.” Rule 255 is specific to Regulation A. Regulation D has different rules on general solicitation, and Regulation Crowdfunding has its own advertising limits.

FAQ

Can a company test the waters before it has filed anything with the SEC?

Yes. Rule 255(a) allows it at any time before qualification, including before the non-public submission or public filing of an offering statement.

Can I collect email addresses and names?

Yes. Rule 255(c) allows a response form for indications of interest and says the issuer may require name, address, telephone number or email address.

Can an investor commit to buy during the testing period?

No. A binding or non-binding commitment and any payment cannot be solicited or accepted until qualification.

Do I need to file testing-the-waters materials with the SEC?

The SEC’s guidance lists them as an exhibit to the offering statement, so issuers file the materials they used with Form 1-A.

What if I change my mind about the offering?

The statements required by Rule 255(b) say that an indication of interest involves no obligation and that offers may be withdrawn or revoked without obligation before acceptance after qualification. The issuer is also not required to complete the offering.

Does the rule apply to Tier 1 and Tier 2?

Rule 255 sits in Regulation A and is not limited by tier, though other conditions, such as state requirements for Tier 1, apply separately.