Massachusetts securities regulator William Galvin sues SEC over small-company offerings

The top securities regulator in Massachusetts has filed a lawsuit against the Securities and Exchange Commission to stop a recently adopted rule he claims curtails state oversight of stock offerings by small and emerging companies.
In his suit in the U.S. Court of Appeals for the District of Columbia, Massachusetts Secretary of the Commonwealth William Galvin asserts that the SEC regulation is “arbitrary, capricious and otherwise not in accordance with” securities laws.
Under the rule, offerings of up to $20 million would have to be filed with the state and the SEC. Those between $20 million and $50 million would require SEC registration only.
State regulators strongly resisted the rule, arguing it pre-empted their oversight of a portion of the market they are best situated to oversee.
The SEC declined to comment on Mr. Galvin’s suit.
The SEC rule was vague in its definition of the kind of investor who qualifies to purchase the small offerings, Mr. Galvin said in an interview. It did not place net worth or salary restrictions, which means that local businesses could target retail investors in the area.
“It’s essentially saying everyone is a qualified purchaser,” Mr. Galvin said. “That’s where the states should definitely be involved.”
The state of Montana also has filed a suit against the rule.
In April, the SEC adopted a regulation, known as Regulation A+, that would ease registration requirements for start-up companies that are seeking to raise up to $50 million.
PART OF JOBS ACT
The rule implements a part of a law, known as the JOBS Act, that is designed to help entrepreneurs raise money for their ventures. But Mr. Galvin argues that Congress did not mean to block states from regulating the process.
“Congress, when drafting the JOBS Act legislation, had considered but rejected preemption of state review of these offerings,” Mr. Galvin’s office said in a news release.
The North American Securities Administrators Association had been touting a coordinated review initiative for Regulation A+ that has been adopted by 46 states, including Massachusetts.
The program established one-stop shopping for firms seeking an okay for their stock offerings in multiple states and guaranteed a 21-day review, as long as there were no deficiencies. The initiative was a way for states to maintain their jurisdiction over Regulation A offerings, which had been capped at $5 million before the new rule.
“The program has been lauded for effectively streamlining the state review process that promotes efficiency by providing centralized filing, unified comments and a definitive timeline for review,” NASAA president and Washington securities director William Beatty said in a March 25 statement.
Mr. Galvin said that NASAA had made its opposition to Regulation A+ well known to the SEC through comment letters.
“I have to wonder whether this was a test pattern in terms of what they could get away with on preemption,” Mr. Galvin said.