Montana and Massachusetts have filed their first brief in their Regulation A+ challenge. They are not happy because Tier 2 offerings under Regulation A+ preempt state review of the offering. Under the text of the rule Tier 2 offerings are preempted because all sales are made to “qualified purchasers.” A qualified purchaser is defined to be any person to whom securities are offered or sold in a Tier 2 offering. The following was adapted from the summary of argument set forth in the brief.

According to the States, the SEC’s rule preempting state securities laws through a definition of “qualified purchaser” that means “any person to whom securities are offered or sold pursuant to a Tier 2 offering of this Regulation A” is contrary to law and should be struck down under the established Chevron analysis. Congress clearly intended the scope of preemption under Section 18(b)(3) of the Securities Act and Title IV of the JOBS Act to be limited to persons who do not require the protections of state registration and qualification requirements because of their wealth, income, and sophistication. The term “qualified purchaser” in those provisions plainly requires a meaningful limitation on potential purchasers, and Congress and the SEC have elsewhere uniformly used the term to mean a limited group of investors with the wherewithal and experience to assume greater risk. The SEC’s new rule conflicts with the statutory framework underlying both provisions, renders the “qualified purchaser” requirement surplusage, and undermines Section 18(b)(3)’s requirement that any definition of the term be “consistent with the public interest and the protection of investors.”

In addition, the States maintain, because the SEC’s rule is neither based on a permissible construction of the Securities Act nor supported by reasoned decisionmaking, it also fails the Chevron analysis. In defending its position, the Commission argued that Section 18(b)(3) allows “qualified purchaser” to be defined differently with respect to different categories of securities. That authority, however, does not allow the Commission to issue a definition that is completely unqualified as to who may purchase the securities. Moreover, the fact that other parts of the rule currently allow investors to lose only up to 10 percent of their net worth (provided that the investors voluntarily comply with this limitation, since issuers need not verify compliance themselves) does not ameliorate the problems with the Commission’s decision to impose no limitation whatsoever based on investors’ wealth, income, or sophistication. Tellingly, the SEC fails to explain why it rejected the definition of “qualified purchaser” that it first proposed in 2001 – a definition that equated the term with “accredited investor” under Regulation D and acknowledged that “similar notions of financial sophistication” underlie both terms.

Finally, according to the States, the rule should be vacated as arbitrary and capricious because the SEC failed to adequately analyze the rule’s effects on investor protection and the public interest. The SEC failed to give due consideration to investor protection in its cost-benefit analysis of state-law preemption for Tier 2 offerings under Regulation A and other aspects of the rule. It acknowledged that preemption in this area will result in the loss of state regulators’ superior knowledge of local issuers and other benefits of state-based reviews, but it provided no evidence or rationale for its claim that other provisions of the rule and states’ retained regulatory authority “could mitigate” these impacts.