D.C. Circuit Upholds The Securities And Exchange Commission’s Newly Promulgated Regulation A-Plus
On June 14, 2016, the United States Court of Appeals for the D.C. Circuit denied consolidated petitions brought by the chief securities regulators for Massachusetts and Montana seeking to vacate a recently-enacted Securities and Exchange Commission (the “Commission”) registration exemption known as Regulation A-Plus. —F.3d—, 2016 WL 3254610 (D.C. Cir. 2016). The Court held that Regulation A-Plus withstood scrutiny under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984), and that the Commission had provided a satisfactory basis for the regulation.
The Commission enacted Regulation A-Plus to comply with provisions of the Jumpstart Our Business Startups Act (“JOBS Act”). Pub. L. No. 112-106, 126 Stat. 306 (2012), which was intended to help small businesses access the capital markets. The JOBS Act directed the Commission to add a new class of securities offerings of up to $50 million – “Tier 2” offerings – to those exempt from federal registration requirements under Regulation A, promulgated under section 3(b) of the Securities Act of 1933 (the “Securities Act”). The JOBS Act further directed that securities to be issued under the new class of securities offerings were to be exempt from state registration and qualification requirements if sold “to a qualified purchaser, as defined by the Commission . . . with respect to that purchase or sale.” In Regulation A-Plus, the SEC effectively defined “qualified purchaser” to mean any investor in a Tier 2 offering. Petitioners argued that this broad definition of “qualified investor” failed to satisfy Chevron and that Regulation A-Plus violated the Administrative Procedure Act.
Applying the first step of the Chevron analysis, the Court found that petitioners had failed to show that the Securities Act “unambiguously foreclosed” the Commission’s definition of “qualified investor” because the plain language of the JOBS Act authorized the Commission to define the term. Accordingly, “[t]he explicit grant of definitional authority manifests that the Congress intended the SEC to enjoy broad discretion to decide who may purchase which securities without the encumbrance of state registration and qualification requirements.” Under step two of the Chevron analysis, the Court found that because Congress has delegated to the Commission the authority to promulgate Regulation A-Plus, the Commission’s definition of “qualified investor” is entitled to deference unless its regulation is “arbitrary, capricious, or manifestly contrary to the statute.” Regulation A-Plus is not arbitrary and capricious, the Court said, because the Commission had explained why its broad definition would aid smaller companies seeking access to the capital markets and how investors remained protected. Tier 2 offerings require issuers to provide audited financial statements to the Commission on a recurring basis and prohibit investment by non-accredited investors of more than 10 percent of their annual income or net worth.
Finally, the Court turned to the Administrative Procedure Act, according to which a rule is “arbitrary and capricious” if the agency does not consider a factor enumerated “under its organic statute.” The Court said that the Commission was obliged to “determine as best it can the economic implications” of Regulation A-Plus. The Commission had done this by providing a “reasoned analysis of how its qualified-purchaser definition strikes the appropriate balance between mitigating cost and time demands on issuers and providing investor protection.” The Commission had explicitly considered the benefits of state law regulations, as well as a finding by the Comptroller General “that state registration and qualification requirements stymied Regulation A’s use in recent years.” In light of these factors, federal and state anti-fraud protection, and the investor protections in place for Tier 2 investors (e.g., disclosure requirements and the 10 percent purchase cap), the Commission reasonably concluded that the “potential decrease in investor protection was balanced by the reduced costs for Tier-2 issuers and purchasers.”