Lindeen v. Securities & Exchange Commission
423 U.S. App. D.C. 155, 825 F.3d 646, 2016 U.S. App. LEXIS 10715 (2016)
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Rule of Law:
When Congress explicitly delegates authority to an administrative agency to define a statutory term, the agency's definition is given controlling weight and will be upheld so long as it is a reasonable policy choice that is not arbitrary, capricious, or manifestly contrary to the statute, even if it preempts state law and departs from prior legislative expectations.
Facts:
- In 1996, Congress enacted the National Securities Markets Improvement Act (NSMIA), which preempted state registration requirements for securities sold to 'qualified purchasers,' and explicitly delegated authority to the Securities and Exchange Commission (SEC) to define that term.
- In 2012, Congress passed the Jumpstart Our Business Startups Act (JOBS Act) to help small businesses raise capital, directing the SEC to update Regulation A to create a new exemption from federal registration requirements.
- The JOBS Act also amended NSMIA to make these new Regulation A securities exempt from state registration if sold to 'qualified purchasers' as defined by the SEC.
- Pursuant to the JOBS Act, the SEC promulgated 'Regulation A-Plus,' which created a 'Tier-2' for offerings up to $50 million.
- The SEC's new rule defined 'qualified purchaser' for Tier-2 offerings as 'any person to whom securities are offered or sold,' thereby preempting state registration and qualification requirements for all Tier-2 offerings.
- As part of the rule, the SEC included other investor safeguards for Tier-2 offerings, requiring enhanced issuer disclosures and limiting purchases by non-accredited investors to 10 percent of their annual income or net worth.
Procedural Posture:
- The Securities and Exchange Commission (SEC) engaged in rulemaking and promulgated a final rule known as Regulation A-Plus.
- William F. Gavin, the chief securities regulator for Massachusetts, and Monica J. Lindeen, the chief securities regulator for Montana, filed timely petitions for review of the SEC's final rule.
- The petitions were filed directly in the United States Court of Appeals for the D.C. Circuit, which consolidated them for review.
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Issue:
Does the Securities and Exchange Commission's rule defining a 'qualified purchaser' for Tier-2 Regulation A offerings as any person, subject to certain investment caps and issuer disclosure requirements, exceed its statutory authority under the Securities Act and violate the Administrative Procedure Act?
Opinions:
Majority - Henderson, Circuit Judge
No. The SEC's rule defining 'qualified purchaser' is a permissible construction of the statute and is not arbitrary or capricious. The court analyzed the rule under the two-step framework from Chevron v. NRDC. At Step 1, the court found the Securities Act did not unambiguously foreclose the SEC's definition. Congress's explicit grant of authority to the SEC to define 'qualified purchaser' and to create different definitions for different securities demonstrates that Congress intended the agency to have broad discretion. At Step 2, the court held the SEC's definition was reasonable and not 'manifestly contrary to the statute.' The SEC cogently explained that its definition, when combined with the other investor protections built into Tier-2 offerings (such as investment caps for non-accredited investors and enhanced issuer disclosure), reasonably balanced the JOBS Act's goal of facilitating capital formation with the statutory mandate to protect investors. The court also rejected the Administrative Procedure Act challenge, finding the SEC's analysis of the rule's economic implications was adequate and its explanation for the policy choice was rational.
Analysis:
This decision strongly reaffirms the principle of Chevron deference, especially where Congress has made an express delegation of definitional authority to an agency. It clarifies that an agency can adopt a definition that diverges from historical legislative suggestions (e.g., that 'qualified' implies wealth or sophistication) if the new definition is part of a reasonable and well-explained regulatory scheme consistent with a newer congressional mandate. The ruling has significant implications for the federal-state balance in securities regulation, sanctioning broad federal preemption that curtails states' traditional 'blue sky' oversight for a major new class of small-business offerings. It solidifies the SEC's power to craft modern capital formation rules that prioritize streamlined national standards over state-by-state review.
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