Securities regulators in two states are making a late-stage effort to kill a Securities and Exchange Commission rule that expands Regulation A, a registration exemption for small companies.
In separate petitions for review filed with the U.S. Court of Appeals for the District of Columbia on May 22, Massachusetts Secretary of State William Galvin and Montana Secretary of State Linda McCulloch are asking the court to intervene ahead of the rule’s June 9 implementation.
Galvin’s filing asks the court “to hold the Commission’s rule arbitrary, capricious, and otherwise not in accordance with the Administrative Procedure Act, the Securities Act of 1933, and other law,” to vacate the rule, and issue “a permanent injunction prohibiting the Commission from implementing and enforcing the rule.”
In March, the SEC adopted new rules that update and expand Regulation A. The updated exemption, mandated by the Jumpstart Our Business Startups (JOBS) Act, will enable smaller companies to offer and sell up to $50 million of securities in a 12 month period, subject to eligibility, disclosure and reporting requirements.
The final rules, often referred to as Regulation A+, provide for two tiers of offerings: Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Both tiers are subject to certain basic requirements; Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements.
A controversial element of the final rule is its preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers” in Tier 2 offerings. It is that preemption, and investor concerns, that are cited in the petitions before the court. “We are dismayed and shocked,” Galvin wrote in a comment letter at the time. “The states have tackled preemption battles on many fronts, but never before have we found ourselves battling our federal counterpart. Shame on the SEC for this anti-investor proposal.”
In March 2014, NASAA, a coalition of state-level securities regulators, voted to approve a new, streamlined review protocol as part of its effort to maintain state oversight despite a push for preemption. The coordinated review program creates one-stop filing for all states in which registration is required, using an Electronic Filing Depository system.