Earlier this week, the North American Securities Administrators Association, which I serve as president, called upon the SEC to make substantial revisions to its Regulation A proposed rule to remove potential harms to issuers and investors, especially those of modest means.
Our March 24 comment letter urged the SEC to withdraw the preemptive provisions from the Regulation A proposal and work with state securities regulators to pursue follow-up rulemakings that will promote the use of Regulation A as intended by Congress.
Typically, when a company seeks to raise capital by marketing securities to a broad audience, it must first register its offering with the SEC, a state (or states) or both to ensure that potential investors have adequate information to make informed investment decisions and to ensure that the enterprise seeking the capital is not operating in an unjust or unfair manner. An offering may qualify for an exemption from registration if it limits the amount of funding sought and the types of investors to whom it is marketed.
One of these exemptions, Regulation A, has allowed unregistered public offerings of up to $5 million of securities in a 12-month period. Title IV of the Jumpstart Our Business Startups (JOBS) Act of 2012 raised to $50 million the amount of money that can be raised through these offerings.
The JOBS Act maintained the authority of states to review these offerings before they are sold to the public. Yet in its proposed rule implementing Title IV, the SEC is attempting to circumvent Congress’s clear intent.
The Commission wants to transform Regulation A offerings into covered securities, which by law are not subject to state review. It has done so by proposing to define who as a “qualified purchaser” anyone who is offered a security issued under Regulation A. In essence the Commission wants to erase the word “qualified” from the law. The practical effect of the agency’s proposed definition on most Regulation A offerings would be exemption from state regulatory review. This end-run to preemption contravenes what Congress set out to do in passing the JOBS Act and sets a dangerous precedent that endangers future investors.
As a regulatory agency, the Commission lacks the authority to define “qualified purchaser” and preempt state registration in the manner contemplated in the Regulation A Proposal. The legislative history of the JOBS Act indicates Congress considered broad preemption of state authority over Regulation A securities and soundly rejected it. Furthermore, the Commission’s proposed definition of “qualified purchaser” is contrary to the plain meaning of the applicable securities laws, the legislative history of the provisions and prior Commission pronouncements.
In fact, the Commission’s proposed approach is contrary to enacted law such that, should it be finalized, there is a significant likelihood that issuers and their counsel, concerned about the legality of the Commission’s actions, would be reluctant to engage in Regulation A offerings. The Commission cannot nullify a statute and NASAA is concerned that the Commission would even consider such an approach.
The Commission’s attempt to preempt state review exceeds the Commission’s statutory authority and fails to adequately consider all relevant costs and the potential harm to both issuers and investors.
Our comment letter calls on the SEC to substantially revise its proposed Regulation A rulemaking to, among other things, craft rules for the implementation of Title IV of the JOBS Act that will promote responsible capital formation, protect investors and preserve the authority of the states to review and register these offerings.
In February, I was joined by 17 past and present NASAA leaders in sending a joint letter to SEC Chair Mary Jo White to voice our strong objections to the Commission’s attempt to preempt state authority. As state securities regulators, we have two core missions: protecting investors and helping small businesses access the capital they need to start their companies and grow much-needed jobs for the economy. We can’t fulfill either if the Commission prohibits our review as it proposes to do. Congress understood this when it passed the JOBS Act.
The logical and legally sound path for the Commission to follow is to work with the states in revitalizing the Regulation A filing process.
For example, state regulators, through NASAA, have been working to develop a Coordinated Review Program for Regulation A Offerings that will help streamline state registration of Regulation A offerings. The program was officially approved by more than 90 percent of NASAA’s members throughout the United States on March 7, 2104.
There is no doubt in our minds that the Commission and the states, standing together, will be much more effective in protecting our citizens and making Regulation A successful for small business filers than we could ever hope to be standing apart.
By adopting a rule compliant with the plain meaning and intent of the statute, while working closely with state securities regulators, the Commission will promote increased use of Regulation A for capital formation and preserve significant investor protections.
For more perspective and information about Regulation A, I invite you to visit NASAA’s Regulation A Resource Center.