22 Jan Regulation A+ Proposal: State Preemption Critical

The North American Securities Administrators Association (NASAA, not to be confused with the space agency) is pushing to allow states to have a chance to complete a merit-based review of offering documents under the newly proposed Regulation A+ (see prior posts). Recall that this has the potential to create a very attractive new IPO regime with scaled disclosure and post-offering reporting that protects investors while making the process of going and staying public much more manageable. One very key element is avoiding the expense, hassle and delay of state review of your offering.

Before the SEC rule proposal was released, NASAA proposed a “coordinated review program” whose apparent attractiveness is selecting one “lead” state to provide comments to filings rather than having potentially every state do so. They are trying to convince the SEC to reverse what is in the proposal, which preempts all state review so long as investors are limited to investing no more than 10% of the greater of their income or net worth. These offering documents already will be reviewed by the SEC and approved by them before any sales take place. The investment limitation and expanded reporting obligations also protect investors. It is not at all clear what individual state interests are greater in this situation.

In past similar NASAA “coordinated review” programs, some were concerned that the state designated to lead the effort was often the most difficult to get through, so as to avoid that state from objecting to another more “permissive” state. Another problem will be that not all states will participate, and this could potentially require individual filings. And even in the coordinated process, individual states are free to also provide comments, and many may do so, not really solving the problem, even if the process of designating the lead is random. But no matter what, utilizing new Regulation A+ will be dramatically less attractive if there is any state merit review.

The language and spirit of the Jumpstart Our Business Startups (JOBS) Act, which mandated these changes, was that state review be exempt for all sales to “qualified purchasers,” a term to be defined by the SEC. Their proposal rightly defines “qualified” as anyone investing in a Regulation A+ offering, who would all subject to the 10% investment limitation. Let’s hope the final SEC rules stick to Congress’ mandate.