Appeals Court Saves SEC's Rule Changes Boosting Crowdfunded Movies

Crowdfunding Illo - H 2015
Illustration by: Wren McDonald

Crowdfunding Illo - H 2015

On Tuesday, the DC Circuit Court of Appeals enjoyed much deserved headlines for upholding the FCC's net neutrality rules, but that same appellate circuit exercised agency deference in another case impacting Hollywood.

Last year, following Congress' passage of the JOBS Act, the Securities and Exchange Commission adopted changes to what's known as Regulation A of the Securities Act of 1933. The amendments boosted the prospects of crowdfunding by raising the cap on certain offerings from $5 million to $20 million, and in some cases $50 million, to both accredited and non-accredited investors. Read more details here.

The changes drew a petition from the chief securities regulators for Massachusetts and Montana, who argued that the SEC had failed to adequately protect investors. Specifically, states are preempted from regulating securities sold to "qualified purchasers," defined by the SEC in its Reg. A amendments as accredited investors or anyone else who limits their purchase to 10 percent of their annual income or net worth. The petitioners argued that purchasers had to be more broadly limited to those with enough financial wealth or sophistication to invest without state-law safeguards.

On Tuesday, the DC Circuit Court intervenes for anyone who might want to, say, buy a piece of Zach Braff's next film if he issued an offering.

Judge Karen Henderson first looks at Congress' intent, writing that lawmakers "intended the SEC to enjoy broad discretion to decide who may purchase which securities without the encumbrance of state registration and qualification requirements" and properly exercised its discretion to protect the public via a purchase cap and reporting requirements.

Henderson states other reasons to bow to the SEC, shrugs off semantic arguments about how "qualified" has typically been construed under federal securities law, and finally, accepts the SEC's explanation on why and how it changed its qualified-purchaser definition. Here's the full opinion.