On June 14, 2016, the D.C. Circuit Court of Appeals in Lindeen v. SEC upheld Regulation A+, including the SEC’s definition of “qualified purchaser.” The decision comes after petitioners William F. Gavin and Monica J. Lindeen, the chief securities regulators for Massachusetts and Montana, respectively, petitioned the court to vacate the SEC’s promulgation of Regulation A+, arguing that it failed the statutory construction test established by the U.S. Supreme Court in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc. Regulation A+ defines “qualified purchaser” as any person to whom securities are offered or sold pursuant to a Tier 2 offering, thus preempting all state registration and qualifications for Tier 2 securities. However, Tier 2 offerings are still subject to an investment limit of no more than 10% of the greater of the investor’s annual income and net worth (for non-accredited, non-natural persons, the 10% limit is based on annual revenues and net assets), although the 10% investment limitation is not applicable to accredited investors or to offerings of listed securities.
The petitioners argued that (1) the commonly understood definition of “qualified,” which modifies “purchaser,” means that the SEC must in some way reduce the universe of “purchasers” from “any purchaser;” (2) the SEC’s definition is not consistent with the public interest and the protection of investors; (3) Regulation A+ renders the word “qualified” superfluous and otherwise conflicts with the structure of the Securities Act of 1933; (4) federal securities law has always linked the term “qualified” with a purchaser’s wealth or sophistication; and (5) the legislative history of the National Securities Markets Improvement Act (NSMIA) demonstrates that Congress wanted the SEC to limit a “qualified purchaser” to one with a certain level of wealth or sophistication. The court denied the petition on the grounds that Congress explicitly authorized the SEC to define qualified purchaser and to adopt different definitions for different types of securities. The court noted that the SEC acted within its grant of authority in determining that any Tier 2 securities purchaser would be qualified so long as it complied with the 10% investment limitation. The court held that the SEC appropriately balanced the goals of mitigating regulatory burdens for certain small offerings and adequately protecting investors in the securities markets. The court also noted that Tier 2 offerings provided sufficient protection, even in the absence of substantive state law review. Furthermore, both the federal and state antifraud statutes still apply to such offerings and the 10% investment limitation weighed in favor of reducing the need for additional state securities law review.
The court’s decision is available at: https://www.cadc.uscourts.gov/internet/opinions.nsf/2A89FF33F1B350E185257FD200505A56/$file/15-1149-1619182.pdf
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