The Sec's New Regulation Ce Exemption: Federal-State Coordination Run Rampant

Abstract

In 1996, the SEC adopted Regulation CE, an exemption from the registration requirements of the Securities Act of 1933 for offers and sales of securities that satisfy the conditions of a California state exemption, section 25102(n) of the California Corporations Code. Section 25102(n), in turn, exempts offerings to "qualified purchasers" and includes a "test-the-waters" provision allowing securities issuers to solicit purchasers. Regulation CE is the first SEC exemption that defers to a state exemption. I argue that, although the substantive provisions of the exemption make sense, this type of rule is problematic. Regulation CE's delegation of authority to California state officials probably exceeds the SEC's regulatory authority and, if the underlying California exemption is amended, the rule faces serious problems under the federal Administrative Procedure Act. Regulation CE probably also conflicts with the recent changes to the preemption provisions of section 18 of the Securities Act. Finally, the incorporation of state law presents some difficult interpretive questions that could have been avoided through the SEC's direct enactment of its own exemption similar to the California provision.

JEL Classification: G38, K22