By Matthew Garza, J.D.
The SEC has issued an order denying a stay of Regulation A+ sought by the state of Montana. The Commission rejected the state’s argument that the rulemaking, set to become effective on June 19, would subject Montana issuers and “unsophisticated and unwary consumers” to irreparable harm, countering that a delay in implementation of the rule would hurt capital formation (In the Matter of Monica J. Lindeen, Release No. 33-9808, June 16, 2015).
Background. Montana sought a stay of the final rule in its entirety for the length of the pendency of litigation in the U.S. Court of Appeals for the D.C. Circuit, where Montana state auditor and commissioner of Securities and Insurance, Monica Lindeen, along with Massachusetts Secretary of the Commonwealth William Galvin, have filed for preemptive relief in Lindeen v. SEC and Galvin v. SEC. Lindeen pursued the stay with the SEC on the argument that the SEC’s definition of “qualified purchaser” was impermissible and the Commission did not conduct sufficient economic analysis of the effect of preempting state laws in Tier 2 offerings.
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 offerings are exempt from state pre-sale review, although they remain subject to some state requirements, including anti-fraud rules. Tier 2 offerings are subject to more strict SEC disclosure and reporting requirements than Tier 1 offerings.
SEC ruling. The SEC recounted that in order to obtain a stay, it must consider whether: (1) the movant has a strong likelihood of success on the merits; (2) a party will suffer imminent and irreparable injury absent a stay; (3) granting a stay will cause substantial harm to any person; and (4) whether a stay would serve the public interest. Lindeen lost on all four factors.
The SEC said that the D.C. Circuit is not likely to agree that the rule’s definition of qualified purchaser is contrary to congressional intent in the JOBS Act and the National Securities Markets Improvement Act of 1996 (NSMIA). Qualified purchasers are defined as “any person to whom securities are offered or sold pursuant to a Tier 2 offering of this Regulation A,” which incorporates the investor protections applicable to all Reg A offerings and the additional requirements of Tier 2 offerings, wrote the Commission.
Chevron deference. The Commission said NSMIA gives it “express and broad” authority to define qualified purchaser by rule and “when Congress expressly delegates definition authority in this fashion, the deference afforded to an agency is at its zenith.” Its judgement is given “controlling weight” unless it is arbitrary, capricious, or manifestly contrary to the statute, as established in Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., reasoned the Commission. Lindeen’s attempt to distinguish the ordinary, dictionary definition of “qualified” from the SEC’s definition was not persuasive to the agency because it said it has express power to define the term separate from its ordinary meaning.
In addition, purchasers in Tier 2 offerings are limited to accredited investors and a requirement that the purchase price not be more than 10 percent of the greater of a purchaser’s annual income or net worth. “The definition is consistent with the statute because it appropriately and reasonable balances the capital formation imperative imposed by Congress with numerous provisions designed to protect investors,” wrote the Commission.
The agency rejected Lindeen’s assertion that the rule amounted to a blanket preemption of state laws. Besides, a limited preemption of state laws was intended by Congress when it passed the JOBS Act, argued the Commission. Tier 2 offerings remain subject to state anti-fraud rules as well as rules requiring filing of documents and fee payments.
The SEC’s order went on to reject the argument that the economic analysis in the adopting release was insufficient, saying that the mandated rulemaking thoroughly analyzed the economic effects of the regulation, including the potential for additional costs imposed by a loss of some investor protections provided by state regulators. The “robust” protections provided by the rule discredited Lindeen’s argument that irreparable harm to investors would result absent a stay, but on the other hand ordering a stay would hurt capital formation by delaying a congressionally mandated fix to the relatively unused Regulation A, the Commission concluded.