Friend of the Court and Friend of the Little Guy? State Securities Regulators Tell D.C. Circuit in Amicus Brief that SEC’s Regulation A+ Is Too Expansive in Defining “Qualified Purchasers”

Wall Street

On September 2, 2015, the North American Securities Administrators Association (NASAA) filed an amicus brief siding with Montana and Massachusetts in a bid to overturn the SEC’s new capital-raising rule, titled Regulation A but commonly referred to as Regulation A+.  The NASAA, a non-profit association of state, provincial, and territorial securities regulators in the United States, Canada, and Mexico, includes securities regulators from all 50 states and the District of Columbia.  The organization’s purpose is to “protect investors from fraud and abuse in connection with the offer and sale of securities.”

Regulation A+, promulgated by the SEC under the Jumpstart Our Business Startups (JOBS) Act of 2012, provides new registration exemptions for businesses to raise up to $50 million in new capital over a 12-month period in so-called “Tier 2” offerings.  This raises the ceiling on previous exemptions, which capped this kind of offering at $5 million.  These Tier 2 offerings are not subject to state review if the securities are sold to “qualified purchasers” or are listed on a national securities exchange.   The intention was to enable newer startup companies to engage in wider capital formation under the new rules.

When the rule came under consideration, some began to refer to these new potential offerings as “crowdfunding” or “mini” IPOs because the new rule opens these offerings to the general public, not just accredited investors.  By defining “qualified purchaser” to mean “any person to whom securities are offered or sold” pursuant to a Tier 2 offering under Regulation A+, the new rule will theoretically allow companies to reach investors outside of the typical hedge fund or venture capital group.  Regulation A+ thereby allows companies to bypass state regulators, which is the crux of the Montana and Massachusetts complaints.

The rule took effect in June of this year.

Montana and Massachusetts filed a challenge to the rule in August in the D.C. Circuit Court of Appeals.  The states argue that the regulation preempted the regulatory powers of the states and should be vacated.  In the states’ view, “qualified purchaser” is a term plainly referring to “limited groups of investors with sufficient wealth, income, and sophistication to protect themselves in the absence of state regulation and qualification requirements.”  The states argue that the new Regulation A+ definition abandons that limitation and creates risks for less sophisticated purchasers of securities.

In its amicus brief, the NASAA argues that state regulators will be hindered in their “ability to protect investors from illiquid, high-risk Regulation A securities offerings” because that regulation will prevent them from reviewing and qualifying Regulation A+ offerings.  NASAA further argues that its Coordinated Review Program allows companies raising funds through Regulation A+ to coordinate compliance with state laws in a relatively inexpensive way.

The NASAA was joined by a number of current and former Democratic members of Congress, who filed an amicus brief making related arguments the same day.