Missouri Real Estate Lawyer

New SEC Regulation A (Reg A+) launched on June 19, 2015.  Just 3 companies have filed Reg A+ offering statements since then.  This compares to roughly 2,000 companies that have filed Regulation D notices with the U.S. Securities and Exchange Commission (SEC) since that day.

Three reasons might account for the lackluster use of Reg A+ thus far: (i) companies are still working on their offering statements, (ii) no one wants to go through the work and expense required to develop a Reg A+ offering statement, rendering Reg A+ largely useless out of the gate, or (iii) no one wants to risk issuing securities under Reg A+ until Galvin v. SEC is resolved.

The first possible reason seems unlikely.  While putting together a Reg A+ offering statement is time consuming, four months has passed since the SEC issued the Reg A+ rules.  Certainly more than three companies would have finished the offering statement by now.

The second possible reason could be a serious issue, but given the nearly unanimous positive commentary about Reg A+ since the end of March when the rules were released, it likewise seems as though more than three companies would have filed Reg A+ offerings by now.  As such, Galvin v. SEC could be the most likely culprit for putting Reg A+ in the deep freeze.

A key feature of Reg A+ is the ability to sell securities to non-accredited investors, those making less than $200k and with net assets of less than $1 mil.  That’s about 92% of all U.S. households.  However, the SEC must review such offerings before any security can be sold under Reg A+.  Apparently a lot of states think that the SEC is incapable of adequately reviewing Reg A+ offerings and that the states must likewise review all Reg A+ offerings so as to better protect the 92% of us who are not accredited investors.

On May 22, 2015, Massachusetts Secretary, William Galvin, and Montana Commissioner, Monica Lindeen, sued the SEC.  They assert that the SEC has overreached its authority to preempt state review of Reg A+ offerings.  Specifically, they assert that the SEC’s preemption of state review under Tier 2 of Reg A+ is “arbitrary, capricious and otherwise not in accordance with the…Securities Act of 1933”.

This argument is specious, as the JOBS Act, which amended the 1933 Securities Act, provides to the SEC the authority to classify Reg A+ securities as “covered securities”, which are exempt from state review.  Nonetheless, Massachusetts and Montana are asking the U.S. Court for the District of Columbia to vacate Regulation A and to enjoin the SEC from implementing and enforcing Regulation A.

These lawsuits make it risky to issue Reg A+ securities.  If Massachusetts and Montana prevail, then all states could go after companies that have issued securities under Reg A+ without first seeking state approval of the offering.  If the lawsuits filed by Massachusetts and Montana are thereby deterring companies from using Reg A+, then the injunction requested by these states is effectively moot.

Massachusetts and Montana must file their initial briefs by August 26, 2015, and the final round of briefs from all parties is due by November 17, 2015.   Barring a continuance of the August deadline, we’ll have a better look then at the legal arguments of Massachusetts and Montana.  Unfortunately, Galvin v. SEC will likely continue well into 2016, and perhaps beyond.  In the meantime, we’ll see if Reg A+ averages better than three filings per month.

The information contained in this article is for informational purposes only and is not intended as legal advice or as investment advice. Your circumstances are likely unique, and you should therefore consult with legal counsel prior to acting on any of the concepts or subjects discussed in this article.

Michael Sewell, MBA and JD, has practiced law in Missouri since 2005, and he is the owner of St. Louis based Sewell Law, LC, which provides legal services in the areas of business formation, private securities, and litigation.

Feel free to contact Michael at michael@SewellLaw.net.

Michael Sewell is also the organizer of www.meetup.com/equity-crowdfunding-STL and www.meetup.com/equity-crowdfunding-KC.

This article was published on July 25, 2015.

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