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From Securities Regulation Daily, September 28, 2015

SEC defends Reg A+ against states’ challenge

By Anne Sherry, J.D.

A brief filed by the SEC in the D.C. Circuit defends the agency’s controversial Regulation A+ against a challenge by state securities regulators. Officials in Montana and Massachusetts asked the appeals court to review the JOBS Act rule’s validity, specifically its broad definition of “qualified purchaser” and preemption of Blue Sky laws. The SEC maintains that the regulation comports with the statutory scheme and is not merely entitled to deference under Chevron, but must be afforded controlling weight (Lindeen v. SEC, September 25, 2015).

Rulemaking. Regulation A+, adopted in Release No. 33-9741 on March 25, created two tiers of offerings: Tier 1 offerings of up to $20 million and Tier 2 offerings of up to $50 million. While Tier 1 offerings remain subject to state regulation, Tier 2 preempts state Blue Sky laws for “qualified purchasers” and imposes additional disclosure and reporting requirements. Title IV of the JOBS Act directed the SEC to define the “qualified purchasers” that would be exempted from state oversight; the rule defines “qualified purchaser” as “any person to whom securities are offered or sold pursuant to a Tier 2 offering.”

States’ challenge. A key argument in opposition to the rule is that the definition of “qualified purchaser” as “any” purchaser reads the word “qualified” out of the JOBS Act mandate. In May, the Montana securities commissioner petitioned the D.C. Circuit for review of Regulation A+. She also requested that the SEC stay the final rule while this review was pending; the agency declined. In August, the Montana commissioner and the Secretary of the Commonwealth of Massachusetts filed a joint opening brief detailing their objections to the rulemaking. The National Small Business Association and NASAA have signed on as amici curiae, as has a coalition of current and former members of Congress who say the rule does not effect Congressional intent.

SEC response. Under the APA, the SEC argues, its rule can be set aside only if it is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” in turn requiring an analysis of the “qualified purchaser” definition under Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. (U.S. 1984). Step one of this analysis requires the court to determine whether Congress has unambiguously expressed its intent to define a term in a particular way, while step two asks whether Congress expressly delegated authority to define the statutory term. According to the Commission, Congress did not unambiguously foreclose its definition of “qualified purchaser” and expressly delegated definitional authority to the SEC. Because the definition is consistent with the Securities Act and the agency reasonably explained how its interpretation is rationally related to Congress’s goal of enhancing access to capital markets, the definition is afforded controlling weight, not mere deference.

The SEC maintains that the state regulators read language into the Securities Act by interpreting the phrase “the public interest and the protection of investors” to require the “qualified purchaser” definition refer to the investor’s “wealth, income, and sophistication.” The petitioners’ argument that the rule does not promote investor protection is an argument about policy, not statutory interpretation, the agency continues, and the argument disregards the protections of amended Regulation A. As to the statutory interpretation argument, Congress could have directed the SEC to craft a definition that considered wealth, income, and sophistication, as it does elsewhere in the securities laws, but it did not do so here. Likewise, the legislative histories of the National Securities Markets Improvement Act and the JOBS Act do not indicate that Congress precluded the SEC’s definition. On the contrary, the history of the JOBS Act underscores Congress’s intent to delegate definitional and preemptive authority to the Commission.

The case is No. 15-1149.

Attorneys: Jesse Laslovich, Office of the Commissioner of Securities and Insurance, for Monica J. Lindeen. Jeffrey Alan Berger for the SEC.

MainStory: TopStory FederalPreemption JOBSAct SecuritiesOfferings DistrictofColumbiaNews

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