Senators Send Letter to SEC Objecting to State Preemption of Reg. A+ Offerings (with Lofchie Comment and YouTube Selection)

Nine U.S. senators sent a letter to SEC Chair Mary Jo White expressing opposition to the "significant" preemptions of state regulatory oversight in the proposed rules regarding Regulation A+ offerings.

In the letter, the senators raised concerns that the SEC broadly preempted Blue Sky laws that preserve the protections of states in the proposed Reg. A rules. That preemption, the senators explained, is inconsistent with the best interests of investors, is "simply and plainly inconsistent with the statute" and must be withdrawn.

The letter clarified the intent of Congress when it enacted Title IV of the JOBS Act, stating that "Congress opted to delegate to the SEC very limited authority to issue rules exempting Regulation A+ securities from state Blue Sky laws if they are sold on a national securities exchange or sold to sophisticated "qualified purchasers." Instead, according to the senators, the proposed rules expand the meaning of "qualified purchasers" from an "exorbitant class of people" to practically anyone who purchases a Reg. A+ security offering. According to the letter, this broad definition "eviscerates" the meaning of "qualified purchaser" and the requirement for listing on a national securities exchange.

The senators stated their concern that preempting the state regulators' authority to police the OTC securities marketplace could increase the risk of securities fraud. The letter was signed by nine senators, including Senators Edward Markey (D-MA), Jeff Merkley (D-OR), Carl Levin (D-MI), Tom Harkin (D-IA), Elizabeth Warren (D-MA) and Mazie Hirono (D-HI).

Lofchie Comment: It is unclear what Congress intended when it enacted Title IV of the JOBS Act. It's hard to see any policy consistency between a Congress that can adopt Dodd-Frank, which mandates significant "protections" for institutional investors doing simple interest rate swaps, and a Congress that can adopt the JOBS Act, freeing up retail investors to buy shares in startups. In the absence of any overarching Congressional policy or clear Congressional guidance, the SEC is vulnerable to attack regardless of how it interprets the law. In fact, the SEC was expressly concerned that, in the absence of a state preemption, state regulators would impose restrictions on JOBS Act offerings that would defeat the purpose of the Act. Whether one agrees with the SEC's proposal or not, the SEC's draft rulemaking was its attempt to do the will of Congress.

Here is some of the key language from the SEC release discussing the proposal criticized by the various Senators:

"We expect that Regulation A offering statements would continue to receive the same level of Commission staff review as registration statements. Additional investor protections would be afforded by Regulation A's limitations on eligible issuers and 'bad actor' disqualification provisions, which we are proposing to expand."

"The requirements for Tier 2 offerings would provide further protection, because the financial statements contained in the offering circular would be required to be audited, the issuer would have an obligation to provide ongoing reporting to purchasers, and such purchasers would be limited in the percentage of income or net worth that could be invested in a single offering. Ongoing reporting would assure a continuing flow of information to investors and could support the development of secondary markets for Regulation A securities, offering the prospect of reduced investor risk through liquidity."

Lofchie YouTube Selection: The Senators' letter to the SEC was pretty firm. Here is a video that raises the question of whether another approach might be more effective.

See: Senators' Letter.
See generally: Current Version of Reg. A; Proposed Version of Reg. A (available to Cabinet subscribers only).
Related news: NASAA Announces Review Program Regarding Regulation A Offerings (May 12, 2014) NASAA Renews Call on SEC to Revise Reg. A Rule Proposal (April 9, 2014); SEC Issues Proposed Rule Amendments for Exemptions under Securities Act Section 3(b) (Fed. Reg.) (January 23, 2014); SEC Proposes Rules and Forms Amending Regulation A (with Delta Strategy Group Summary) (December 19, 2013); SEC Proposes Amendments to Reg. A to Increase Access to Capital for Smaller Companies (December 18, 2013).