States Challenge Reg A+ Preemption

Terry Flanagan

The SEC’s Reg A+ rules under the Jumpstart Our Business Startups (JOBS) Act, which become effective on June 19, are being challenged by state regulators who claim that its powers to preempt state regulatory filings are overly broad.

On May 27, the United States Court of Appeals for the District of Columbia Circuit, on its own motion, consolidated petitions filed by Massachusetts and Montana cases challenging Reg A+ preemption of state securities law registration and qualification requirements.

The rules provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers,” defined to be any person to whom securities are offered or sold under a Tier 2 offering.

Companies conducting Tier 2 offerings would be required to provide audited financial statements, and to file annual, semiannual and current event reports. In other words, if an issuer is willing to satisfy the additional requirements to qualify for Tier Two, than every purchaser under the SEC rules is a qualified purchaser.

“What Montana and Massachusetts are saying, and indeed what all the state regulators are saying, although not all of them have sued, is ‘That’s not what Congress meant by qualified purchaser, they didn’t mean it to be that broad, they intended something else,’” Mark Roderick, an attorney who heads Flaster/Greenberg’s crowdfunding practice, told Market Media.

According to the North American Securities Administrators Association, during debate of the JOBS Act, Congress considered and decisively rejected calls to preempt states from review of Regulation A+ offerings.

“Regulation A+ allows companies to raise up to $50 million a year from non-accredited investors, but the most important part about the new rule is that for the first time a company only has to register with the SEC and does not have to register with every state where it wants to sell its securities,” said Roderick. “Whereas previously you had to register with every state where you’re going to sell the securities, and that made Regulation A unusable for practical purposes.”

The states’ actions are in part a reflexive action to prevent an encroachment on their authority. “This is a fairly significant pulling away of jurisdiction from the state regulators, so two of them have sued to ask the court system to invalidate the SEC regulation, claiming that the SEC overstepped its authority in adopting these new rules,” Roderick said.

Roderick said that the lawsuits don’t pose much of a threat to Reg A+ “for the legal reason that administrative agencies, whether they’re the Internal Revenue Service interpreting a tax statute or the SEC interpreting a security statute, are given very broad discretion to interpret statues. It’s very unusual that an agency’s interpretation of a statue is overturned by a court. Courts generally will overturn those administrative decisions only if the decisions are arbitrary or capricious.”

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