04 Sep State Challenges of Reg A+ Move Ahead

As reported by Crowdfund Insider, Massachusetts and Montana filed their first “Opening Brief” in their case against the SEC trying to invalidate the regulations passed under Regulation A pursuant to the Jumpstart Our Business Startups (JOBS) Act of 2012. Essentially, they say the SEC overstepped its statutory authority when it preempted state review of offerings to “qualified purchasers” (as required by the JOBS Act) by saying all investors in Regulation A deals are deemed qualified.

The brief ignores the fact that unaccredited investors cannot invest more than 10% of their income or net worth, which does create a level of qualification even if not technically included in the definition. They are using this technical argument, unfortunately, to pursue a different agenda, namely seeking to limit as much as possible the preemption of state review of Regulation A (and potentially in the future other) public offerings. States will still review offerings where companies choose Tier I of Regulation A raising less than $20 million.

Represented by their lobbying group NASAA (the North American Securities Administrators Association), the states believe they can do a better job than the SEC in reviewing public offerings and detecting fraud. The fact that they were doing it in the 1800s before the SEC existed, as they attempt to argue, does not qualify them today in my opinion. One level of smart and intense review is sufficient. There are not unique state interests in securities offerings as there are in social issues where local mores matter. Massachusetts, which back in the day deemed the Apple IPO too risky and wouldn’t allow it, and Montana, should consider picking up their marbles and calling it a day. IMHO.