On Monday, the commonwealth of Massachusetts said it was joining the state of Montana in suing the Securities and Exchange Commission over a JOBS Act rule that bars them from regulating some small securities offerings.
The SEC rule, known as Regulation A+, mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act, creates two tiers of offerings subject to lighter regulation, disclosure and reporting requirements than larger securities sales.
Tier 1, for offerings of up to $20 million or less in a 12-month period, requires registration with the state and with the SEC. (Issuers can opt out of state registration in exchange for heavier disclosure requirements).
Tier 2, for offerings of up to $50 million in 12 months, requires only SEC registration and preempts any state law regulating offerings of this size, except for anti-fraud laws. Investors in Tier 2 offerings, though, are restricted to those who are either accredited or are subject to other limitations. For example, non-accredited investors can purchase in a Tier 2 offering of no more than 10% of the greater of the investor’s annual income or net worth.
Massachusetts’ chief securities regulator, William Galvin, is asking the Federal Court of Appeals for the District of Columbia to review the SEC regulation and find it “arbitrary, capricious, and otherwise not in accordance with the Administrative Procedure Act, the Securities Act of 1933, and other law,” according to a statement.
Both Massachusetts and Montana filed their appeals Friday.
Galvin adds that Congress, when drafting the JOBS Act legislation, considered but rejected pre-emption of state review of these offerings. The review petition asks the court to vacate the rule and permanently enjoin the SEC from implementing it.
The North American Securities Administrators Association is also uncomfortable with the SEC’s current stand on the offerings.
“The concerns raised by Massachusetts and Montana in their challenge to the SEC final rules implementing amendments to Regulation A are similar to those highlighted in NASAA comment letters to the SEC during the rulemaking process. In our letters we encouraged the SEC to work with the states to craft final rules that would maintain state authority to review and qualify Regulation A offerings consistent with federal law and for the protection of investors,” said NASAA President and Washington Securities Director Bill Beatty, in a statement.
“The SEC, however, chose to adopt rules that expand the types of Regulation A offerings that will be exempt from state review and registration contrary to the clear provisions of the applicable federal law and with little regard for the potential adverse impact on investors,” Beatty explained. “While it is unclear how long it will take the courts to sort out these legal issues, NASAA remains committed to working with the SEC and the states to make the most out of Regulation A and new Regulation A+ for the benefit of investors and business alike.”
In March, the SEC adopted final rules to facilitate smaller companies’ access to capital by updating Regulation A, an existing exemption from registration for smaller issuers of securities. Since that time, the rules have been referred to as Regulation A+.
“These new rules provide an effective, workable path to raising capital that also provides strong investor protections,” said SEC Chairwoman Mary Jo White, in a statement at the time. “It is important for the Commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies.”
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