Law School Case Brief
Lindeen v. SEC - 423 U.S. App. D.C. 155, 825 F.3d 646 (2016)
The language of Securities Act § 18 (15 U.S.C.S. § 77r) confirms that the Congress has not directly spoken to the meaning of qualified purchaser in relation to state preemption. Instead, the Congress explicitly authorized the U.S. Securities and Exchange Commission (SEC) to define the term, as provided in § 77r(b)(3), and to adopt different definitions for different types of securities. The explicit grant of definitional authority manifests that the Congress intended the SEC to enjoy broad discretion to decide who may purchase which securities without the encumbrance of state registration and qualification requirements.
Pursuant to a 2015 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. The SEC also provided that anyone buying a certain subset of the securities would be considered a "qualified purchaser." In doing so, the SEC preempted all state registration and qualification requirements for the subset based on the Securities Act provision, 15 U.S.C.S. § 77r(b)(4)(D), that exempts from state registration and qualification requirements securities offered or sold to "qualified purchasers." Petitioners William F. Gavin and Monica J. Lindeen were the chief securities regulators for Massachusetts and Montana, respectively. They argued 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 failed both parts of the United States Supreme Court's statutory construction standards set forth in the Chevron case. They also argued that Regulation A-Plus should be vacated as arbitrary and capricious because the Commission failed to explain adequately how it protects investors.
Taking into consideration the fact that the Securities and Exchange Commission declined to adopt a qualified-purchaser definition, did the Commission act arbitrarily and capriciously in adopting Regulation A-Plus, which created a new class of securities offerings freed from federal-registration requirements?
According to the U.S. Circuit Court of Appeals, an explicit grant of definitional authority to the U.S. Securities and Exchange Commission pursuant to Securities Act § 18 regarding the term "qualified purchaser" in relation to state preemption, as provided in § 77r(b)(3), gave the agency discretion to determine which purchasers were qualified without requiring any particular level of wealth or sophistication, and thus the broad definition set forth at 17 C.F.R. § 230.256 did not conflict with unambiguous congressional intent. Furthermore, the Court ruled that the Commission provided a reasoned explanation for its definition, including a discussion of why it diverged from a previous proposal. As such, the Commission complied with its obligation under Securities Act § 2(b) to balance reduced costs against a potential decrease in investor protection and did not act arbitrarily or capriciously. The Court denied the consolidated petitions for review and upheld Regulation A-Plus.
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