States Challenge Blue Sky Preemption Under Regulation A+

On May 27, the Federal Court of Appeals for the District of Columbia combined lawsuits filed by the commonwealth of Massachusetts and the state of Montana against the Securities and Exchange Commission. The lawsuits seek to enjoin the implementation of new Regulation A+ prior to its June 19 effective date. Both Montana and Massachusetts contend that Regulation A+ exceeded the SEC’s congressional mandate by pre-empting state “blue sky” review of Tier 2 offerings under Regulation A+.

Tier 2 under Regulation A+ will permit eligible issuers to offer and sell up to $50 million of securities in any 12-month period, without complying with state blue sky laws, provided that the offering is qualified by the SEC. Issuers engaging in Tier 2 offerings also will be subject to ongoing reporting obligations and other requirements under the SEC’s new rules. Blue sky pre-emption is critical to the viability of Regulation A+, and the need to comply with blue sky laws (along with a $5 million offering size limit) is one of the principal reasons that the currently existing Regulation A is rarely used.

Accordingly, the resolution of the combined lawsuits may have significant implications for the development of a Regulation A+ market.