The U.S. Court of Appeals for the District of Columbia Court rejected a challenge to SEC Regulation A+ by state securities regulatory authorities in Montana and Massachusetts.
The SEC argued that it created Regulation A+ rules under Title IV of the JOBS Act in an effort to revitalize Regulation A, an exemption from Securities Act registration requirements applicable to small public offerings. In relevant part, Regulation A+ rules preempt state law for so-called "Tier 2" Regulation A offerings (i.e., offerings up to $50 million). Individual non-accredited investors may invest up to the greater of (i) 10% of their net worth or (ii) 10% of their net income in such an offering and are able to self-certify their income or net worth for the purposes of the investment limits. The issuers in a Tier 2 offering must file a disclosure document, along with two years' audited financials, with the SEC. They also are subject to ongoing disclosure requirements. The SEC defined "qualified purchaser" as "any person to whom securities are offered or sold pursuant to a Tier 2 offering of this Regulation A."
The petitioners argued that Regulation A+ was inappropriate because it failed to adopt an appropriately limited "qualified purchaser" standard, and, therefore, the SEC was not entitled to deference under the test established by Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. Further, the petitioners asserted that Regulation A+ should be vacated as arbitrary and capricious because the SEC failed to explain adequately how it protects investors and promotes efficiency, competition and capital formation.
The Court of Appeals applied the Chevron analysis and determined, first, that Congress had not spoken directly to the meaning of qualified purchaser in relation to state preemption and, second, that Congress had authorized the SEC explicitly to define the term with broad discretion. On that basis, the Court found that the SEC's definition did not conflict with Congress' unambiguous intent, and was based on a permissible construction of the statute. Accordingly, the Court found the SEC's qualified-purchaser definition to be within the scope of the agency's authority and gave it Chevron deference. Additionally, the Court determined that the rule was neither arbitrary nor capricious because the SEC provided sufficient explanation of how its definition strikes a balance between (i) mitigating cost and time demands on issuers and (ii) providing protections for investors.
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