The States of Montana and Massachusetts had previously challenged Regulation A+’s preemption of state securities registration and qualification requirements in Tier-2 offerings. The United States Court of Appeals for the District of Columbia rejected the States’ challenge.
The dispute largely centered on the grant of authority to the SEC under the JOBS Act to define the term “qualified purchaser.” Applying Step 1 of the so-called Chevron analysis, the Court found the JOBS Act gave the SEC an explicit grant of definitional authority to decide who may purchase securities without the encumbrance of state registration and qualification requirements. The clear grant of authority easily overcame the States’ hyper-technical arguments to the contrary.
In Step 2 of the Chevron analysis, a court will defer to the SEC as long as its definition is based on a permissible construction of the statute. Where there is an express delegation of authority, as there was here, the Court will give the regulation controlling weight unless it is arbitrary, capricious, or manifestly contrary to the statute.
In Step 2, the states largely reiterated the arguments the Court rejected in Step 1. The Court found that Congress clearly exempted qualified purchasers from State requirements. Further the SEC offered a reasoned explanation for the choice of its interpretation. The fact that the SEC had proposed other definitions in the past bore little weight because an initial agency interpretation is not instantly carved in stone.
Finally, the States challenged Regulation A+ as arbitrary and capricious in violation of the Administrative Procedure Act. According to the States, a single paragraph was not enough to explain why the Regulation might minimize the adverse effects of blue sky preemption. The Court disagreed, stating the SEC provided a reasoned analysis of how the qualified purchaser definition strikes the appropriate balance between mitigating cost and time demands on issuers and providing investor protection. According to the Court, the Tier-2 requirements reduced the need for, and expected benefits of, state review.