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Court of Appeals Affirms SEC’s Reg A+, Rejecting States’ Arguments

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The U.S. Court of Appeals for the D.C. Circuit on Tuesday shot down attempts by Massachusetts and Montana securities regulators to nullify the Securities and Exchange Commission’s capital raising rule, Regulation A+.

The petitioners, William Galvin and Monica Lindeen, the chief securities regulators for Massachusetts and Montana, respectively, argued that because the SEC “declined to adopt a qualified-purchaser definition limited to investors with sufficient wealth, revenue or financial sophistication to protect their interests without state protection, Regulation A-Plus fails both parts of the United States Supreme Court’s statutory construction standards enunciated in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842–43 (1984).”

Galvin and Lindeen also argued that the rule “should be vacated as arbitrary and capricious because the SEC failed to explain adequately how it protects investors.”

Judge Karen L. Henderson rejected their argument, saying, “The petitioners’ common-use argument is straightforward: in their view, the dictionary definition of ‘qualified’ manifests that ‘qualified purchasers’ cannot mean ‘all’ Tier-2 purchasers. But when the ‘Congress explicitly authorize[s]’ an agency to ‘define [a] term,’ it ‘necessarily suggests that Congress did not intend the word to be applied in its plain meaning sense.”

She continued: “And when the Congress enacted the NSMIA [National Securities Markets Improvement Act] and the JOBS Act, it not only gave the Commission authority to determine which purchasers are qualified but it also permitted the Commission to define the term differently for different types of securities offerings.”

The SEC released Reg A+ under the Jumpstart Our Business Startups (JOBS) Act on March 25, 2015.

As Henderson’s ruling explains, after reviewing extensive public commentary on various qualified-purchaser definitions, the SEC defined the term as “any person to whom securities are offered or sold pursuant to a Tier[-]2 offering of this Regulation A.”

As a result, Reg A+ preempted all state registration and qualification requirements for Tier-2 securities either purchased by an “accredited investor” or purchased by anyone else so long as the non-accredited investor refrained from purchasing securities valued at more than 10% of their net worth or annual income.

Galvin noted in a Wednesday statement that his office is “disappointed that the Court failed to address the harm to the average investor which results from preemption. We brought this case because it is our firm belief Congress never intended to give the SEC unfettered discretion to preempt state registration and qualification provisions.”

Galvin said that State Securities Divisions, “have been and will remain the primary advocate for investor protection in connection with the offers and sales of securities. Reducing paperwork is a poor excuse for abandoning investor protection.”

He added: “We believe the pendulum will swing back towards investor protection, but I fear it may be too late for investors harmed by the mad rush to deregulate and dismantle securities laws. We are reviewing the opinion and considering all of our options.”

SEC Chairwoman Mary Jo White said on May 19 that the agency is “monitoring out the gates” how the three capital-raising measures the agency put into effect under the JOBS Act “are working.” Those measures include Rule 506(c), Regulation A+ and Regulation Crowdfunding, which White said are designed to foster new ways for smaller companies to access the capital markets, but “we must ensure that the exemptions are both workable for issuers and providing appropriate investor protections.”  

The SEC’s enforcement division as well as other agency divisions, including the Division of Economic and Risk Analysis, is “taking a close look” at Rule 506(c) private as well as Reg A+ offerings under the JOBS Act, Vincente Martinez, chief of the SEC Enforcement Division’s Office of Market Intelligence, said in late February.


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