Lindeen v. Securities & Exchange Commission ( 2016 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 14, 2016 Decided June 14, 2016
No. 15-1149
MONICA J. LINDEEN, MONTANA STATE AUDITOR,
EX OFFICIO MONTANA COMMISSIONER OF SECURITIES AND
INSURANCE,
PETITIONER
v.
SECURITIES AND EXCHANGE COMMISSION,
RESPONDENT
Consolidated with 15-1150
On Petitions for Review of a Final Rule
of the Securities & Exchange Commission
Robert E. Toone Jr., Assistant Attorney General, Office
of the Attorney General for the Commonwealth of
Massachusetts, argued the cause for the petitioner. Maura
Healy, Attorney General, and Jesse Laslovich and Nicholas J.
Mazanec, Special Assistant Montana Attorneys General,
Office of the Montana State Auditor, were with him on brief.
Seth G. Schofield, Assistant Attorney General, Office of the
Attorney General for the Commonwealth of Massachusetts,
entered an appearance.
2
Anne-Valerie S. Mirko was on brief for the amicus curiae
North American Securities Administrators Association, Inc. in
support of the petitioner.
John Vail 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 was on brief for the amicus curiae National
Small Business United Association in support of the
respondent.
Before: HENDERSON, Circuit Judge, and GINSBURG and
SENTELLE, Senior Circuit Judges.
Opinion for the Court filed by Circuit Judge HENDERSON.
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
3
(Regulation A[-Plus]), 1 80 Fed. Reg. 21,806 (Apr. 20, 2015)
(to be codified at 17 C.F.R. pts. 200, 230, 232, 239, 240, 249,
& 260). The SEC also provided that anyone buying a certain
subset of the securities will be considered a “qualified
purchaser.” Id. at 21,809, 21,858. In doing so, the SEC
preempted all state registration and qualification requirements
for the subset based on the Securities Act provision that
exempts from state registration and qualification requirements
securities offered or sold to “qualified purchasers.” See 15
U.S.C. § 77r(b)(4)(D).
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.
1
The SEC promulgated “Regulation A” in 1936. The rule
challenged here modernized Regulation A and is referred to as
“Regulation A-Plus.”
4
I. STATUTORY & REGULATORY BACKGROUND
Securities regulation has existed, in one form or another,
since the mid-1800s. 2 Before the Great Depression, securities
were regulated almost exclusively by the states and,
beginning with Kansas in 1911, many states imposed
comprehensive securities regulation regimes. 3 Known as
“blue-sky” laws, 4 state systems often required not only pre-
sale registration of securities but also pre-sale “qualification”
or “merit” review of security sales. Generally, state
substantive review prohibited securities sales the state deemed
unfair, unjust or inequitable. See, e.g., Act of Mar. 6, 1933,
ch. 47, § 4, 1933 Mont. Laws 72, 76.
After the 1929 stock market crash, the Congress began
regulating securities at the federal level. Rather than
following the state substantive-review model, the Congress
chose instead to mandate pre-sale disclosure of material
information to investors. It did so by enacting, first, the
Securities Act of 1933 (Securities Act), 15 U.S.C. §§ 77a–
77aa, which regulates the sale of securities in the primary
market and, second, the Securities Exchange Act of 1934
2
See, e.g., Act of May 21, 1852, ch. 303, 1852 Mass. Acts 208(requiring railroad companies chartered in Massachusetts to file
certificates “stating that all of the stock named in [their] charter has
been subscribed for by responsible parties, and that twenty
per cent[] of the par value of each and every share of the stock
thereof has been actually paid into the treasury of the company”).
3
See also, e.g., Act of Mar. 13, 1913, ch. 85, 1913 Mont. Laws
367; Act of May 27, 1921, ch. 499, 1921 Mass. Acts 622.
4
See Hall v. Geiger-Jones Co., 242 U.S. 539, 550 (1917)
(“The name that is given to the law indicates the evil at which it is
aimed; that is, . . . speculative schemes which have no more basis
than so many feet of ‘blue sky’ . . . .”).
5
(Exchange Act), 15 U.S.C. §§ 78a–78pp, which created the
Commission and established rules governing the resale or
exchange of securities in the secondary market. Both the
Securities Act and the Exchange Act have evolved
considerably since they were first enacted. This case arises
against the backdrop of amendments to the Securities Act.
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 15 U.S.C. §§ 77c–
77h. Because the section 5 registration process is often
prohibitively expensive for small companies, the Congress
enacted section 3(b) of the Securities Act, which allows the
Commission, through rulemaking, to exempt from federal-
registration requirements certain small-dollar offerings, so
long as the Commission finds that federal registration is not
required to protect both investors and the public interest. Id.
§ 77c(b)(1). In 1936, the SEC exercised its section 3(b)
authority to promulgate “Regulation A.” See SEC Release
No. 33-632 (Jan. 21, 1936).
Originally, Regulation A allowed a company to file a less
expensive “offering statement,” rather than the pricey section
5 registration statement, before offering securities for sale. 17
C.F.R. §§ 230.252–.253. To further protect investors,
Regulation A forbade any securities sale until SEC staff
“qualified” the issuing company’s offering statement;
moreover, Regulation A obligated the issuing company to
deliver an offering circular to investors before consummating
any sale. After the sale, investors had the protection of
federal antifraud statutes, see, e.g., 15 U.S.C. § 77q; id.
§ 78j(b); 17 C.F.R. § 240.10b-5, as well as the Securities
Act’s civil liability provisions for false or misleading
statements, see, e.g., 15 U.S.C. § 77c(b)(2)(D); id. § 77l(a)(2).
6
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.
A. NATIONAL SECURITIES MARKETS IMPROVEMENT ACT
OF 1996 (NSMIA), PUB. L. NO. 104-290, 110 STAT. 3416
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 widespread basis, state registration and qualification
regimes for some offerings while leaving intact the states’
authority to investigate fraud and to assess fees. See 15
U.S.C. § 77r(c)(1), (c)(3).
5
See, e.g., H.R. REP. NO. 104-622, at 16 (1996), reprinted in
1996 U.S.C.C.A.N. 3877, 3878 (NSMIA intended to “eliminate the
costs and burdens of duplicative and unnecessary regulation” by
“designating the Federal government as the exclusive regulator of
national offerings of securities” while allowing states to “retain
authority to regulate small, regional, or intrastate securities
offerings”).
7
The NSMIA achieved this goal by creating a list of
“covered” (i.e., preempted) securities. Id. § 77r(a)(1)(A).
Covered securities include, inter alia, securities listed on the
New York Stock Exchange or the NASDAQ National Market
System and those issued by a registered investment company.
Id. § 77r(b)(1)–(2). The NSMIA also intended the SEC to
play a role in determining its preemptive scope. Specifically,
it included in its list of covered securities any security sold “to
qualified purchasers, as defined by the Commission by rule.”
Id. § 77r(b)(3). It also granted the Commission authority to
“define the term ‘qualified purchaser’ differently with respect
to different categories of securities, consistent with the public
interest and the protection of investors.” Id. In the view of
both the House 6 and Senate 7 committees that advanced the
NSMIA, “qualified purchasers” would not need state
regulatory protection in light of their financial worth and
sophistication.
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
6
See H.R. REP. NO. 104-622, at 31 (“[T]he Committee intends
that the Commission’s definition [of qualified purchasers] be rooted
in the belief that ‘qualified’ purchasers are sophisticated investors,
capable of protecting themselves in a manner that renders
regulation by State authorities unnecessary.”).
7
See S. REP. 104-293, at 15 (1996) (“The bill also codifies
another exemption existing in most states—the preemption from
state ‘blue sky’ registration for offers and sales to qualified
purchasers. Based on their level of wealth and sophistication,
investors who come within the definition of ‘qualified purchasers’
do not require the protections of registration.”).
8
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. 17 C.F.R. § 230.501(a). They include,
for instance, business entities, banks, trusts and nonprofit
organizations with total assets that exceed $5 million, as well
as any natural person with a net worth exceeding $1 million.
See id. The SEC never finalized the rule using the Rule
501(a) definition.
B. JUMPSTART OUR BUSINESS STARTUPS ACT (JOBS ACT),
PUB. L. NO. 112-106, 126 STAT. 306
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 Securities Act,
which directed the SEC to revamp Regulation A. See 15
U.S.C. § 77c(b)(2). Specifically, section 3(b)(2) required the
SEC to promulgate a rule adding a new class of securities to
section 3’s list of those exempt from federal-registration
requirements. See id. It also sketched out the rough
parameters for this new class. See id. § 77c(b)(2)(A)–(G).
For instance, it mandated that the aggregate offering amount
of section 3(b)(2) securities was not to exceed $50 million and
the sale of the securities was not to be restricted, see id.
§ 77c(b)(2)(A), (C); it also provided the SEC with authority to
create other requirements the Commission deemed necessary
9
to advance the public interest and to protect investors. See id.
§ 77c(b)(2)(G).
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 15 U.S.C. § 77r(b)(4)(D). Title IV did so
by expanding the section 18 “covered securities” list to
include securities issued pursuant to section 3(b)(2) so long as
the securities were offered or sold either (1) on a national
securities exchange or (2) “to a qualified purchaser, as defined
by the Commission pursuant to [section 18(b)(3)] with respect
to that purchase or sale.” Id. An earlier iteration of Title IV
would have also preempted state requirements for any section
3(b)(2) security offered or sold through a broker or dealer, see
H.R. REP. NO. 112-206, 2 (2011), but, after some
congressmembers expressed concern about the wide
preemptive effect this provision would have, 8 it was removed
before the bill became law.
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.
8
See, e.g., 157 CONG. REC. H7231 (daily ed. Nov. 2, 2011)
(statement of Rep. Gary Peters) (“Regulation A securities can be
high-risk offerings that may also be susceptible to fraud, making
protections provided by the State regulators an essential
[feature].”); H.R. REP. NO. 112-206, 13 (2011) (minority view)
(“Regulation A securities are sometimes high-risk offerings that
may be susceptible to fraud, making the protections provided by
state review essential.”).
10
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
offerings up to $50 million and include additional investor
safeguards. Some of the proposed safeguards were directed at
Tier-2 issuers—for instance, the SEC proposed requiring
issuers to provide audited financial disclosures with offering
circulars and to file, on a continuing basis, annual and semi-
annual financial reports with the SEC. Other proposed
safeguards were directed at Tier-2 purchasers—specifically,
the SEC proposed capping Tier-2 purchases at 10 per cent of
the investor’s annual income or net worth, whichever is
greater.
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
9
The final rule increased the Tier-1 offering limit to $20
million.
11
commenters, however, “strongly supported some form of state
securities law preemption” and the SEC received a 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 defined the term as
“any person to whom securities are offered or sold pursuant to
a Tier[-]2 offering of this Regulation A.” 80 Fed. Reg. at
21,899 (emphasis added) (codified at 17 C.F.R. § 230.256).
As a result, Regulation A-Plus preempted all state registration
and qualification requirements for Tier-2 securities either
(1) purchased by an “accredited investor” or (2) purchased by
anyone else so long as the non-accredited investor refrained
from purchasing securities valued at more than 10 per cent of
his net worth or annual income. 11 See id. at 21,895–96,
21,899.
10
See, e.g., 79 Fed. Reg. at 3,969 (suggesting, inter alia, that
SEC define “qualified purchaser” as “[a]ny purchaser in a
Regulation A offering”; “[a]ny purchaser meeting a specified net
worth standard, set at or lower than the current ‘accredited investor’
definition in Rule 501 of Regulation D”; “[a]ny purchaser meeting
a net worth or income test based on thresholds below accredited
investor thresholds, combined with an investment cap”; and “[a]ny
purchaser who purchased through a registered broker-dealer”).
11
Tier-1 offerings, in contrast, remain subject to state
registration and qualification requirements.
12
As required by section 2(b), see 15 U.S.C. § 77b(b),
Regulation A-Plus analyzed whether its qualified-purchaser
definition protects investors and “promote[s] efficiency,
competition, and capital formation.” 80 Fed. Reg. at 21,864.
It did so in light of the JOBS Act goal of “expand[ing] the
capital raising options available to smaller and emerging
companies.” Id. at 21,865. After acknowledging that
eliminating state-level review might reduce investor
protection, see id. at 27,886–87, the SEC explained that
“[s]everal factors could mitigate” the risk, including the
“substantial protections” built into Tier-2 offerings—i.e., the
10 per cent purchase cap and the more rigorous financial
disclosure requirements for issuers, id. at 21,887.
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 15
U.S.C. § 77i, and section 702 of the Administrative Procedure
Act (APA), see 5 U.S.C. § 702.
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
13
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 precise 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
15 U.S.C. § 77r(b)(3) (“qualified purchaser[]” is to be
“defined by the Commission by rule”), and to adopt different
definitions for different types of securities, see id. 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. Exercising this grant, the SEC concluded that
all purchasers of Tier-2 securities are qualified so long as non-
accredited purchasers limit their purchase to 10 per cent of
their annual income or net worth. Nothing in the text of the
Securities Act “unambiguously foreclose[s]” the SEC from
adopting this definition. Vill. of Barrington, Ill., 636 F.3d at
659.
The petitioners nonetheless insist that the SEC’s
definition fails at Chevron step 1 because: (1) the commonly
14
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,” 15 U.S.C.
§ 77r(b)(3); (3) Regulation A-Plus renders the word
“qualified” superfluous and otherwise conflicts with the
structure of the Securities Act; (4) federal securities law has
always linked the term “qualified” with a purchaser’s wealth
or sophistication; and (5) the NSMIA’s legislative history
demonstrates that the Congress wanted the SEC to limit a
“qualified purchaser” to one with a certain level of wealth or
sophistication. None of the petitioners’ arguments is
persuasive.
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 the “Congress explicitly
authorize[s]” an agency to “define [a] term,” it “necessarily
suggests that Congress did not intend the word to be applied
in its plain meaning sense.” Women Involved in Farm Econ.
v. USDA, 876 F.2d 994, 1000 (D.C. Cir. 1989) (emphasis in
original). 12 And when the Congress enacted the NSMIA and
the JOBS Act, it not only gave the Commission authority to
12
See also Rush Univ. Med. Ctr. v. Burwell, 763 F.3d 754, 760
(7th Cir. 2014) (challenger “insists that the ‘plain language’ of a
law still controls the meaning of a term even when Congress
expressly delegates authority to define the supposedly ‘plain’ term
to an agency. We cannot accept this argument. The plain language
of the statute delegates definitional authority to the Secretary; to
excise that portion would give the statute a new and unintended
meaning. It would also undermine Congress’s ability to delegate
the power to define terms and thrust the courts into a role that
Congress meant to reserve for the agency.”).
15
determine which purchasers are qualified but it also permitted
the Commission to define the term differently for different
types of securities offerings. See 15 U.S.C. § 77r(b)(3). The
petitioners identify no statutory provision that bars the SEC
from concluding that all Tier-2 purchasers are “qualified” in
view of the other investor protections built into Tier-2.
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 reporting
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
13
The petitioners point out that the SEC does not require Tier-
2 offerors to verify that non-accredited purchasers have capped
their respective investments at 10 per cent of their income or net
worth. Nothing in the Securities Act, however, requires the SEC to
ensure investor protection by requiring offerors to police their
investors’ purchases.
16
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 purchasers 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,”
15 U.S.C. § 77r(b)(4)(D)(ii); by instructing the Commission
to determine the circumstances under which a “purchaser” is
“qualified,” the Congress plainly intended the SEC to
delineate the scope of state-law preemption.
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 it is true that some securities
provisions associate the term “qualified” with a purchaser’s
ability to undertake financial risk, 14 the petitioners’ argument
14
See, e.g., 15 U.S.C. § 78c(a)(54)(A), (B) (for exception to
broker-dealer Exchange Act registration requirement, “qualified
investor” is defined as investment companies, banks, small business
investment companies, state-sponsored employee benefit plans,
institutional trusts, market intermediaries, and natural persons,
corporations or partnerships that own and invest on a discretionary
basis more than $25 million (or, in some circumstances, $10
million)); 17 C.F.R. § 230.144A(a)(1) (for SEC Rule 144A,
“qualified institutional buyer” is defined as large sophisticated
institutional investors that own and invest on discretionary basis at
least $100 million in securities and banks and other specified
financial institutions with net worth of at least $25 million).
17
proves only that when the Congress wishes to define
“qualified” by reference to wealth or sophistication, it knows
how to do so. Here, the Congress’s decision to leave the
definition to the SEC’s discretion demonstrates that the
Congress wanted to give the SEC wide latitude. At a
minimum, the petitioners’ argument falls short of establishing
unambiguous congressional intent that a “qualified purchaser”
meet a certain level of wealth or sophistication.
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 Senate 15 and
House 16 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, 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 indicated by its text,” Consumer Elecs. Ass’n v.
FCC, 347 F.3d 291, 298 (D.C. Cir. 2003); see also id.(“[W]hile such history can be used to clarify congressional
15
See S. REP. 104-293, at 15 (“Based on their level of wealth
and sophistication, investors who come within the definition of
‘qualified purchasers’ do not require the protections of
registration.”).
16
See H.R. REP. 104-622, at 31 (“[T]he Commission is given
flexible authority to establish various definitions of qualified
purchasers” but, “[i]n all cases, . . . the Committee intends that the
Commission’s definition be rooted in the belief that ‘qualified’
purchasers are sophisticated investors, capable of protecting
themselves in a manner that renders regulation by State authorities
unnecessary”).
18
intent even when a statute is superficially unambiguous, the
bar is high.” (quotation marks omitted)). To accept the
petitioners’ legislative-history argument would be to
“abandon altogether the text of the statute as a guide in the
interpretative process.” Shannon v. United States, 512 U.S.
573, 583 (1994).
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. at842–43. But “[b]ecause Congress has authorized the
Commission . . . to prescribe legislative rules, we owe the
Commission’s judgment more than mere deference or
weight.” United States v. O’Hagan, 521 U.S. 642, 673 (1997)
(quotation marks omitted). Indeed, where, as here, “there is
an express delegation of authority to the agency to elucidate a
specific provision of the statute by regulation,” we give the
regulation “controlling weight unless [it is] arbitrary,
capricious, or manifestly contrary to the statute.” Chevron,
467 U.S. at 843–44; see also United States v. Mead Corp.,
533 U.S. 218, 227 (2001) (“When Congress has explicitly left
a gap for an agency to fill, . . . any ensuing regulation is
binding in the courts unless procedurally defective, arbitrary
or capricious in substance, or manifestly contrary to the
statute.” (quotation marks omitted)).
The petitioners insist that the SEC’s qualified-purchaser
definition “is actually ‘manifestly contrary to the statute’ ”
19
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
20
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. Telecomm. 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 qualified-purchaser definition changed from
the qualified-purchaser definition it proposed (but never
finalized) in 2001. We disagree. It bears noting at the outset
that “[a]n initial agency interpretation is not instantly carved
in stone,” Anna Jacques Hosp. v. Burwell, 797 F.3d 1155,
1170 (D.C. Cir. 2015) (quoting Chevron, 467 U.S. at 863).
Moreover, “a proposed regulation does not represent an
agency’s considered interpretation of its statute and . . . an
agency is entitled to consider alternative interpretations before
settling on the view it considers most sound,” CFTC v. Schor,
478 U.S. 833, 845 (1986). Moreover, the Commission
explained that its 2001 proposed definition “contemplated that
state securities review and qualification requirements would
be preempted” for all securities although its “rules to
implement Title IV of the JOBS Act provide for preemption
in the more limited circumstances in which the requirements
of [s]ection 3(b)(2) and the rules adopted thereunder are
satisfied.” 80 Fed. Reg. at 21,859. Given the “new and
21
different context” outlined in Title IV, id. at 21,860, the SEC
explained that, notwithstanding it may have been appropriate
“to focus on attributes of the purchaser when crafting a
‘qualified purchaser’ definition that would have applied in a
broad set of possible transactions,” its Tier-2 qualified-
purchaser definition “serves a different purpose because it
applies only in Regulation A offerings,” id. at 21,559–60,
which, as already discussed, include additional investor
safeguards. See supra § I.C.
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, 5 U.S.C.
§ 706(2)(A). A “rule is arbitrary and capricious” if an
“agency fail[s] to consider . . . a factor the agency must
consider under its organic statute,” Pub. Citizen v. Fed. Motor
Carrier Safety Admin., 374 F.3d 1209, 1216 (D.C. Cir. 2004);
section 2(b) of the Securities Act requires that, if the
Commission “consider[s] or determine[s] whether an action is
necessary or appropriate in the public interest,” it must also
“consider, in addition to the protection of investors, whether
the action will promote efficiency, competition, and capital
formation.” 15 U.S.C. § 77b(b). This inquiry contemplates
that the Commission will “determine as best it can the
economic implications of the rule.” Chamber of Commerce v.
SEC, 412 F.3d 133, 143 (D.C. Cir. 2005). In the petitioners’
view, the Commission failed to discharge this duty when it
“offered only a single paragraph to explain why existing state
22
law and the new rule might lessen the adverse effects of ‘blue
sky’ preemption.” Pet’rs’ Br. 65.
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 antifraud enforcement
authority, enhanced and continuing issuer disclosure
requirements and the 10 per cent purchase cap—the SEC
concluded that the Tier-2 requirements “reduce[d] the need
for, and the expected benefits of, state review.” Id. at 21,887.
Given the JOBS Act mandate to revitalize Regulation A, the
SEC concluded that the potential decrease in investor
protection was balanced by the reduced costs for Tier-2
issuers and purchasers. See id.
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
23
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.