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The Securities and Exchange Commission ("SEC") recently adopted a novel exemption from the registration requirements of the Securities Act of 1933. This new exemption, Regulation CE, contains a single rule, Rule 1001, that exempts from registration "[o]ffers and sales of securities that satisfy the conditions of paragraph (n) of Sec. 25102 of the California Corporations Code ...." California section 25102(n), in turn, exempts offerings to "qualified purchasers" and includes a "test-the- waters" provision that allows issuers to solicit purchasers in writing, even if non-qualified investors receive the solicitation.
Regulation CE is part of the SEC's continuing effort to ease the regulatory burdens on small businesses issuing securities. The intent of the regulation is to facilitate capital raising by small businesses by providing a coordinated federal-state exemption, without sacrificing investor protection.
Regulation CE is the first coordinated federal-state exemption that defers to the state exemption. While states have previously adopted exemptions from state registration tied to compliance with federal exemptions, this is the first transaction exemption adopted by the SEC that defers to a state exemption. The basic idea underlying Regulation CE-allowing issuers to solicit qualified purchasers-is sensible, but the SEC's execution of that idea creates a regulatory quagmire. In essence, the SEC is giving California authorities the power to determine the scope of an exemption from federal securities law. Regulation CE's delegation of authority to California state officials probably exceeds the SEC's regulatory authority. In addition, the language of Regulation CE effectively allows California officials to amend the federal exemption without further proceedings at the federal level-a possible violation of the federal Administrative Procedure Act. Finally, applying Regulation CE to so-called "covered securities" violates the preemption provisions Congress recently added to section 18 of the Securities Act.
Even if Regulation CE is valid, the interaction of federal law and California law presents difficult interpretive questions. For instance, as drafted, calculation of the "aggregate offering price" of a Regulation CE offering is troublesome. Additionally, the application of the integration doctrine to Regulation CE offerings is confusing. If the SEC had drafted the regulation more carefully, these problems could have been avoided.
This article first introduces and outlines the Regulation CE exemption- a task that can only be fully accomplished by also reviewing the requirements of section 25102(n) of the California Corporations Code. The accompanying appendix to this article focuses, in particular, on the definition of "qualified purchaser" and the wandering trail one must follow to give content to that term. The article then examines the SEC's authority to adopt an exemption like Regulation CE and whether Regulation CE is consistent with section 18 of the Securities Act. Finally, the article examines the difficult interpretive issues this new type of federalstate coordination raises-in particular, the determination of the "aggregate offering price" of a Regulation CE offering and the application of the integration doctrine to Regulation CE offerings.