Lindeen v. Securities & Exchange CommissionLindeen v. Securities & Exchange Commission
Anne-Valerie S. Mirko, Washington, DC, was on brief fоr the amicus curiae North American Securities Administrators Association, Inc. in support of the petitioner.
John Vail, Washington, DC, was on brief for the amici curiae Current and Former Members of Congress in support of the petitioner.
Jeffrey A. Berger, Senior Litigation Counsel, Securities and Exchange Commission, argued the cause for the respondent. Michael A. Conley, Deputy General Counsel, Jacob H. Stillman, Solicitor, Randall W. Quinn, Assistant General Counsel and Benjamin M. Vetter, Senior Counsel, were with him on brief.
William M. Cunningham, pro se, was on brief for the amicus curiae William M. Cunningham in support of the respondent.
Ford C. Ladd, Washington, DC, was on brief for the amicus curiae National Small Business United Association in support of the respondеnt.
Before: HENDERSON, Circuit Judge, and GINSBURG and SENTELLE, Senior Circuit Judges.
KAREN LeCRAFT HENDERSON, Circuit Judge:
Pursuant to congressional mandate, the Securities and Exchange Commission (SEC or Commission) created a new class of securities offerings freed from federal-registration requirements so long as the issuers of these securities comply with certain investor safeguards. See Amendments for Small and Additional Issues Exemptions Under the Securities Act (Regulation A[-Plus]),1 80 Fed. Reg. 21,806 (Apr. 20, 2015) (to be codified at
The petitioners, William F. Gavin and Monica J. Lindeen (collectively, petitioners), are the chief securities regulators for Massachusetts and Montana, respectively. They argue that, because the SEC declined to adopt a qualified-purchaser definition limited to investors with sufficient wealth, revenue or financial sophistication to protect their interests without state protection, Regulation A-Plus fails both parts of the United States Supreme Court’s statutory construction standards enunciated in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984). They also argue that it should be vacated as arbitrary and capricious because the Commission failed to explain adequately how it protects investors. For the following reasons, we deny the consolidated petitions for review.
I. STATUTORY & REGULATORY BACKGROUND
Securities regulation has existed, in one form or another, since the mid-1800s.2 Be-
Notes
After the 1929 stock market crash, the Congress began regulating securities at the federal level. Rather than following the state substantive-review model, the Cоngress chose instead to mandate pre-sale disclosure of material information to investors. It did so by enacting, first, the
Under section 5 of the Securities Act, a company must file a registration statement and a prospectus with the SEC before it offers its securities for sale. See
Originally, Regulation A allowed a company to file a less expensive “offering statement,” rather than the pricey section 5 registrаtion statement, before offering securities for sale.
Although section 3(b) exempted Regulation A offerings from federal-registration requirements, the offerings generally remained subject to state registration and merit-review restrictions, which increased compliance costs for the issuing company. This was especially true for a company desiring to issue securities in multiple states with varying substantive criteria.
Aware of the problems caused by concurrent state and federal regulation, the Congress enacted the National Securities Markets Improvement Act of 1996 (NSMIA), Pub. L. No. 104-290, 110 Stat. 3416. Designed to alleviate the “redundant, costly, and ineffective” dual federal/state regulatory system, H.R. CONF. REP. NO. 104-864, at 39, reprinted in 1996 U.S.C.C.A.N. 3920, 3920, the NSMIA designated the federal government to oversee nation-wide securities offerings while allowing the states to retain control over small, regional or intrastate offerings.5 The NSMIA did so by amending section 18 of the Securities Act to preempt, on a wide-spread basis, state registration and qualification regimes for some offerings while leaving intact the states’ authority to investigate fraud and to assess fees. See
The NSMIA achieved this goal by creating a list of “covered” (i.e., preempted) securities. Id.
In 2001, the SEC proposed a rule that would have defined “qualified purchaser” universally (i.e., for any securities purchase) to mean “accredited investor” as defined by SEC Rule 501(a) of Regulation D. See Defining the Term “Qualified Purchaser” Under the Securities Act of 1933, 66 Fed. Reg. 66,839 (Dec. 27, 2001). SEC Rule 501(a), in turn, provides a list of persons and entities deemed “accredited investors,” all of which possess greater-than-average levels of financial wherewithal.
Following the most recent economic recession, in 2012 the Congress passed the Jumpstart Our Business Startups Act (JOBS Act), Pub. L. No. 112-106, 126 Stat. 306 (2012). The JOBS Act was intended to spur job creation and economic growth by increasing small-business access to capital markets. By enacting Title IV of the JOBS Act (Title IV), the Congress meant to resuscitate the SEC’s historically underutilized Regulation A. It did so in three ways.
First, Title IV added section 3(b)(2) to the Securitiеs Act, which directed the SEC to revamp Regulation A. See
Second, Title IV provided that some of the securities issued under the SEC’s forthcoming section 3(b)(2) rule were to be exempt from state registration and qualification requirements. See
Third, Title IV ordered the Comptroller General to conduct, within three months of the JOBS Act’s enactment, a study to determine the effect of state blue-sky laws on Regulation A offerings. The Comptroller General complied and, in July 2012, reported that the limited use of Regulation A was caused, in part, by the cost of complying with state laws.
C. Section 3(b)(2) Rule
On January 23, 2014, the SEC complied with the section 3(b)(2) mandate and proposed a rule designed to overhaul Regulation A. See Proposed Rule Amendments for Small and Additional Issues Exemptions Under Section 3(b) of the Securities Act, 79 Fed. Reg. 3,926 (Jan. 23, 2014). The SEC rule proposed the creation of two Regulation A offering “tiers.” Id. at 3,927. Tier-1 was to apply to offerings up to $5 million and, for the most part, to employ the same federal controls Regulation A had used since its original promulgation in 1936.9 Tier-2, in contrast, would apply to
The proposed rule acknowledged the Comptroller General’s conclusion that the cost of state blue-sky law compliance may have contributed to Regulation A’s disuse. Many commenters also expressed concern about the cost of state law compliance and some proposed ways to alleviate the burden. For example, the North American Securities Administrators Association (NASAA), appearing as amicus here, proposed a coordinated state review process to harmonize different state substantive requirements. Most commenters, however, “strongly supported some form of state securities law preemption” and the SEC received а variety of suggestions regarding potential “qualified purchaser” definitions.10 Id. at 3,969. As a result, the SEC announced that it intended to promulgate a qualified-purchaser definition to “protect offerees and investors in Regulation A securities, while streamlining compliance and reducing transaction costs.” Id.
On March 25, 2015, the SEC released Regulation A-Plus. After reviewing extensive public commentary on various qualified-purchaser definitions, the SEC de-
As required by section 2(b), see
On May 22, 2015, the petitioners filed timely petitions for review of the SEC’s qualified-purchaser definition. Our jurisdiction arises under section 9 of the Securities Act, see
II. ANALYSIS
The petitioners argue that the term qualified purchaser cannot mean “any person” to whom Tier-2 securities are offered or sold but instead must limit the universe of purchasers to those with enough financial wealth or sophistication to invest without state-law safeguards. Pet’rs’ Br. 1, 3 (emphasis added). They insist that the SEC’s rule fails both at Chevron Step 1 and at Step 2. They also argue that Regulation A-Plus must be vacated as arbitrary and capricious. We address their arguments in turn.
A. Chevron Step One
In the petitioners’ view, the SEC’s qualified-purchaser definition, which does not restrict Tier-2 sales to wealthy and/or sophisticated investors, contravenes the plain meaning of the Securities Act. To succeed, they must demonstrate that the Securities Act “unambiguously foreclosed” the SEC’s qualified-purchaser definition. Vill. of Barrington, Ill. v. Surface Transp. Bd., 636 F.3d 650, 659 (D.C. Cir. 2011) (quotation marks omitted). They have not done so.
To discern the Congress’s intent, we generally examine the statutory text, structure, purpose and its legislative history. See Bell Atl. Tel. Co. v. FCC, 131 F.3d 1044, 1047 (D.C. Cir. 1997). That said, “[t]he starting point for our interpretation of a statute is always its language,” Cmty. for Creative Non-Violence v. Reid, 490 U.S. 730, 739 (1989), and, here, the language of section 18 confirms that the Congress has not “directly spoken to the prеcise question at issue”—namely, the meaning of qualified purchaser in relation to state preemption. Chevron, 467 U.S. at 842. Instead, the Congress explicitly authorized the Commission to define the term, see
The petitioners nonetheless insist that the SEC’s definition fails at Chevron step 1 because: (1) the commonly understood definition of “qualified,” which modifies “purchaser,” means that the Commission 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,”
The petitioners’ common-use argument is straightforward: in their view, the dictionary definition of “qualified” manifests that “qualified purchasers” cannot mean “all” Tier-2 purchasers. But when
Next, the petitioners argue that, because the Securities Act requires that any definition of qualified purchaser must advance “the public interest and the protection of investors,” id. the SEC had to promulgate a definition tied to investor wealth or experience. But the Congress explicitly granted the SEC discretion to determine how best to protect the public and investors, see id. and the SEC, in exercising its discretion, concluded that Tier-2 investors are sufficiently protected by Tier-2’s purchase cap and repоrting requirements. See 80 Fed. Reg. at 21,877. Although the petitioners lament that Tier-2 purchasers “may now lose up to 10 percent of their net worth in Regulation A[-Plus] offerings,” Pet’rs’ Br. 41,13 their challenge to the SEC’s definition does not amount to an unambiguous statutory mandate that the SEC protect investors as the petitioners might prefer.
The petitioners also argue that the SEC definition conflicts with the Securities Act’s structure because it (1) renders the term “qualified” superfluous, (2) nullifies the requirement that the definition serve the public interest and investor protection and (3) amounts to unlawful agency preemption of state law, which is a power possessed by the Congress alone. But the SEC did not nullify the term “qualified”; rather, it concluded that all Tier-2 purсhasers are qualified. See 80 Fed. Reg. at 21,899. And the SEC’s definition does not ignore its obligation to promulgate a definition consistent with the best interests of the public and investors; rather, as discussed, see supra § I.C, the SEC explained why it thought its definition achieved this goal. Finally, it was the Congress, not the SEC, that decided to preempt state registration and qualification requirements when a security is “offered or sold to a qualified purchaser,”
Undeterred, the petitioners argue that federal securities law has always construed the term “qualified investor” or “qualified purchaser” to mean a limited group with the ability to protect their interests. While
Finally, the petitioners argue that the NSMIA’s legislative history makes plain that the Congress intended “qualified purchaser” to apply only to wealthy or sophisticated investors. As noted, both the Senate15 and House16 committees that advanced the NSMIA believed that qualified purchasers could fend for themselves without state-law protection. But “even the most formidable argument concerning the statute’s purposes [cannot] overcome the clarity [found] in the statute’s text,” Kloeckner v. Solis, 568 U.S. 41, 133 S.Ct. 596, 607 n. 4 (2012), and “only rarely have we relied on legislative history to constrict the otherwise broad application of a statute indicat-
Because Regulation A-Plus does not conflict with the Congress’s unambiguous intent, it does not falter at Chevron Step 1 and, accordingly, we proceed to Chevron step 2.
B. Chevron Step Two
The petitioners also argue that the SEC’s qualified-purchaser definition is unreasonable and therefore fails at Chevron Step 2. Typically, at Chevron Step 2, we defer to the Commission so long as its definition is “based on a permissible construction of the statute.” Chevron, 467 U.S. at 842-43. But “[b]ecause Congress has authorized the Commission . . . to prescribe legislative rules, we owe the Commission’s judgment more than
The petitioners insist that the SEC’s qualified-purchaser definition “is actually ‘manifestly contrary to the statute’ ” because it imposes no restrictions based on investor wealth, income or sophistication. Pet’rs’ Br. 57 (quoting Chevron, 467 U.S. at 843). Their Chevron Step 2 arguments mirror their Chevron Step 1 arguments and, for all of the reasons set out in our Chevron Step 1 discussion, we believe the SEC acted reasonably and within its broad definitional authority when it decided that all Tier-2 investors are considered “qualified purchasers.”
The petitioners advance three additional Chevron Step 2 arguments but none has merit. First, they insist that we must apply a presumption against preemption, according the SEC no deference because, in their view, the Congress’s preemptive purpose was not “clear and manifest.” Medtronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996) (quotation marks omitted). We have, however, “rejected the argument that wherever a federal agency’s exercise of authority will preempt state power, Chevron deference is inappropriate.” Albany Eng’g Corp. v. FERC, 548 F.3d 1071, 1074 (D.C. Cir. 2008) (quotation marks omitted). In any event, the Congress’s decision to exempt “qualified purchasers” from state requirements was “clear and manifest,” Medtronic, Inc., 518 U.S. at 485, as was its decision to authorize the SEC, in its discretion, to determine the scope of state preemption by defining when a “purchaser” is “qualified.”
The petitioners’ second argument is that the SEC failed to provide a reasoned explanation for its definition. Although an agency enjoys Chevron Step 2 deference “only if [it] has offered a reasoned explanation for why it chose that interpretation,” Vill. of Barrington, Ill., 636 F.3d at 660, the SEC did in fact explain how its “final rules for Regulation A will provide for a meaningful addition to the existing capital formation options of smaller companies while maintaining important investor protections.” 80 Fed. Reg. at 21,813. The Commission explained that its definition protects investors because Tier-2 offerings require that offerors provide audited financial statements to purchasers and to the SEC on a recurring basis; it also explained that non-accredited Tier-2 purchasers are not permitted to risk more than 10 per cent of their annual income or net worth. Id. at 21,858, 21,861. The SEC further explained how its definition helps to revitalize Regulation A, which was the Congress’s primary purpose in enacting the JOBS Act. Id. at 21,858-59. For these reasons, we find that the SEC has “cogently explain[ed] why it has exercised its discretion in a given manner” and its “explanation [is] . . . sufficient to enable us to conclude that [its action] was the product of reasoned decisionmaking.” U.S. Telecom Ass’n v. FCC, 227 F.3d 450, 460 (D.C. Cir. 2000) (quotation marks omitted).
The petitioners’ third argument is that the SEC failed to explain why its
Because the Commission’s qualified-purchaser definition is not “arbitrary, capricious, or manifestly contrary to the statute,” Chevron, 467 U.S. at 844, it does not fail Chevron Step 2.
C. APA REVIEW
Finally, the petitioners challenge Regulation A-Plus as arbitrary and capricious, in violation of the APA,
We disagree. By providing a reasoned analysis of how its qualified-purchaser definition strikes the “appropriate balance between mitigating cost and time demands on issuers and providing investor protections,” 80 Fed. Reg. at 21,888 (emphasis added), the Commission has complied with its statutory obligation. It considered the benefits of blue-sky review, concluding that it “may aid in detecting fraud and facilitating issuer compliance” by providing another level of investor protection. Id. at 21,886-87. It also considered the costs imposed on issuers by blue-sky review, relying on the Comptroller General’s conclusion that state registration and qualification requirements stymied Regulation A’s use in recent years. See id. at 21,868. After discussing the Tier-2 protections afforded to investors in the absence of state law review—e.g., federal and state anti-fraud enforcement authority, enhanced
In the petitioners’ view, the rule should nonetheless be vacated because the SEC failed to show that Tier-2’s safeguards “will actually mitigate the identified costs of preemption.” Pet’rs’ Br. 67 (emphasis added). For its part, amicus NASAA faults the SEC for relying on “little to no evidence” regarding the costs of state-law compliance and state-law preemption. NASAA Br. 26-27. But, as noted, Regulation A was rarely used, which means that the Commission did not have the data necessary to quantify precisely the risks of preemption for investors and the costs of state-law compliance for issuers. We do not require the Commission “to measure the immeasurable” and we do not require it to “conduct a rigorous, quantitative economic analysis unless the statute explicitly directs it to do so.” Nat’l Ass’n of Mfrs. v. SEC, 748 F.3d 359, 369 (D.C. Cir. 2014) (quotation marks omitted), overruled on other grounds by Am. Meat Inst. v. USDA, 760 F.3d 18 (D.C. Cir. 2014) (en banc). Here, we find that the SEC’s “discussion of unquantifiable benefits fulfills its statutory obligation to consider and evaluate potential costs and benefits,” Inv. Co. Inst. v. CFTC, 720 F.3d 370, 379 (D.C. Cir. 2013); because the SEC articulated “a satisfactory explanation for its action[,] including a rational connection between the facts found and the choice[ ] made,” Business Roundtable v. SEC, 647 F.3d 1144, 1148 (D.C. Cir. 2011) (quotation marks omitted), we uphold Regulation A-Plus.
For the foregoing reasons, the consolidated petitions for review are denied.
So ordered.