As you may know, Montana has filed a “Petition For Review” to challenge the final rules adopted by the SEC under Title IV of the JOBS Act (commonly referred to as Regulation A+). In connection with its suit, Monica J. Lindeen, Montana State Auditor and ex officio Securities Commissioner, filed a motion with the SEC in early June to stay the effective date of the final Regulation A+ rules pending the outcome of the litigation. Per an order released by the SEC late yesterday, that motion has been officially denied … and in rare style no less.
Montana’s suit mirrors the earlier “Petition For Review” filed by William Galvin, Secretary of the Commonwealth of Massachusetts, both of which have now been consolidated into a single action. The suits seek to have the Regulation A+ rules vacated as allegedly being arbitrary and not in accordance with the Administrative Procedures Act. The real issue at hand however, is the state pre-emption provisions of “Tier II” offerings under the final Regulation A+ rules which significantly scale back the individual state’s rights to regulate and police “Tier II” Regulation A+ deals before they are sold to the public. With its recent motion to the SEC, Montana had hoped to have the effective date of the new Regulation A+ rules stayed until the pending suit is resolved. All hopes of that however were quashed with the release of an “Order Denying Stay” by the SEC late yesterday.
In support of is decision to deny the requested stay, the SEC noted in the Order that, among other things, the requested stay failed to satisfy any of the applicable “four-factors” (see page 3 of the Order), because:
- Lindeen’s motion for stay failed to demonstrate a strong likelihood that Montana’s litigation would succeed on its merits;
- Lindeen’s motion for stay failed to show imminent and/or irreparable harm if the effective date of the new Regulation A+ rules was not stayed;
- Granting the requested stay would result in substantial harm to “issuers” and “investors;” and
- Granting the requested stay would not serve the public interest (and, in fact, would “thwart Congress’s goal of increasing capital formation opportunities”).
I don’t think anyone (other than possibly Ms. Lindeen and Mr. Galvin) would actually expect the SEC to stay the effectiveness of Regulation A+ pending the outcome of the current litigation. That being said, you really have to admire the eloquent and precise manner in which the SEC basically smacked Montana down on every claim in its Order. For example, in discussing the proposed merits of Montana’s claim that the SEC’s definition of “qualified purchaser” is “contrary to the plain meaning” of the JOBS Act, the SEC stated:
“The JOBS Act reinforced the Commission’s definitional authority … [and] [w]hen Congress expressly delegates definitional authority in this fashion, the deference afforded to an agency is at its zenith. The Commission’s judgment in defining a term is given “more than mere deference or weight”—it is given “‘controlling weight’””
“Congress gave us the right to define the term and what we say goes.”
However, I think Chris Tyrell put it best during our discussion when he said “If you’re going to smack someone down, do it with eloquence at its zenith.”
Montana has already stated that if its request for stay with the SEC was denied that it would request a stay with the courts. I have not seen any sign of such court requested stay to date and with the new Regulation A+ rules set to become effective this Friday the 19th, the clock is ticking. We can only hope that both Montana and Massachusetts will eventually see the light and give up this ridiculous litigation but that seems highly unlikely. I guess we will have to take solace in the fact that it looks like the Regulation A+ rules will continue to move forward even as this litigation plays out in the background.
Anthony Zeoli Anthony Zeoli is an experienced transactional attorney with a national practice. Specializing in the areas of securities, commercial finance, real estate and general corporate law, his clients range from individuals and small privately held businesses to multi-million dollar entities. Zeoli is also an industry-recognized crowdfunding and JOBS Act expert who, most recently, has drafted a bill to allow for an intrastate crowdfunding exemption in Illinois, a copy of which can be found on his website: IllinoisCrowdfundingNow.com. Zeoli is also currently actively involved with the entrepreneurship program at the University of Illinois at Chicago as both a mentor and a student advisor and is an active advisory board member of the New York Distance Learning Association (NYDLA).
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