02 Sep Dem. Senators Oppose Blue Sky Preemption in Regulation A+

About a month ago, eight senior Democratic Senators (including Sen. Al Franken, above) wrote to SEC Chair Mary Jo White to oppose the SEC’s proposed rules under the Jumpstart Our Business Startups (JOBS) Act of 2012 regarding Regulation A public offerings. In particular, the Senators believe the effort to effectively eliminate state blue sky review of these offerings in exchange for substantial disclosure is not acceptable to them. The JOBS Act says that Reg A+ offerings can avoid state blue sky review if sold to “qualified purchasers,” a term the Congress left to the SEC to define. Allowing these offerings to avoid the costly, time-consuming and at times deal-destroying state review of over-the-counter IPOs through Regulation A could be a game-changer for small companies trying to access a public trading stock.

The SEC decided to allow all purchasers to be deemed “qualified,” but also imposed mandatory disclosure requirements that exceed previous Reg A minimums. They viewed “qualified” as someone able to take care of themselves, and assumed all individuals receiving substantial disclosure at the time of the offering and continuous reporting thereafter was able to do so. The Senators believe the statute meant to require some level of sophistication to investors avoiding blue sky review, regardless of the level of disclosure. They believe the state review is essential to avoiding fraud in the over-the-counter markets, as a “critical second level of protection for consumers from securities fraud,” according to the letter. They point to important enforcement initiatives, ignoring that the states’ enforcement powers remain unchanged by the law.

My view: the SEC does a very solid job of reviewing public offerings. The states will continue to be able to play an active enforcement role when there is trouble. They will also be able to regulate brokers and intermediaries acting in their state who help companies complete these offerings. The SEC’s Regulation A+ proposal struck a brilliant balance between extensive disclosure and reporting requirements in exchange for greater access to investors to stock offerings by emerging growth companies. Hopefully the Commissioners will not be swayed by the lobbying efforts of the state securities administrators.