Case Status: Active

Defending a Software Entrepreneur Against an Illegal SEC Power Grab

  • Federal District Courts

SEC v. Blanchard

Background

The U.S. Securities and Exchange Commission (SEC), the national agency primarily responsible for policing Wall Street and the public stock market, sued Anthem Hayek Blanchard for allegedly violating federal securities laws when he offered investments in his startup software company to a small group of sophisticated investors. But in bringing this suit, the SEC has dramatically overstepped its statutory authority and intruded in matters properly regulated by state law. Anthem’s company wasn’t publicly traded. Nor were the investments he offered typical securities. Instead, the investments were privately negotiated agreements between sophisticated parties. In other words, Anthem’s startup was among the tens of millions of small businesses that form the backbone of the economy.

CIR is representing Blanchard to challenge the SEC’s authority to regulate these types of personal transactions. The central question is whether federal law applies to private investments between individuals with a preexisting relationship. This sort of agreement is traditionally governed by state law, not Washington D.C. bureaucrats looking to expand their regulatory power.

Legal Claims

CIR argues that the SEC’s actions in this case severely exceed its statutory authority, which was meant to regulate the national markets in the wake of the Great Depression. In Marine Bank v. Weaver (1982), the Supreme Court implicitly recognized the importance of federalism, writing  that Congress did not intend for federal securities laws to apply to all instances of alleged fraud in commercial transactions. As other federal courts have explained, Congress primarily intended the securities laws to apply to the national markets to ensure that investors could make informed decisions about investments. The SEC was never meant—as it now claims—to second-guess every private business agreement between entrepreneurs and sophisticated investors. State law, rather than federal law, governs these sorts of private, ordinary transactions.

This case implicates federalism principles at the heart of our constitutional structure. If the SEC is right, and every private investment agreement can be regulated by federal law, then the SEC has successfully federalized a massive area of law traditionally left to the states. For hundreds of years, the states and private litigants have enforced state prohibitions against fraud and related commercial offenses, including state securities laws and regulations. Wall Street’s chief regulator, with all the resources of its vast federal bureaucracy, has no businesses overseeing even the smallest business agreements that occur every day throughout the country.

The SEC’s overreach not only is wrong as a matter of federal statutory text and congressional intent, but it also undermines the responsibility and accountability that the States have always preserved. That’s why cases like Marine Bank and others placed real limits on the scope of federal securities law. How those limits work in practice is still unsettled, but this case offers an important opportunity to help define them. In this case, the SEC has clearly gone too far.

CIR’s argument rests on two key points:

  1. Statutory Limits on Federal Power – The Securities Act of 1933 and the Exchange Act of 1934 empower the SEC regulate public stock offerings. But that authority doesn’t stretch to private deals among people with personal or professional ties.
  2. State Law Should Not be Undermined – Enforcement of traditional state prohibitions against fraud and related state laws that regulate commercial transactions should not be undermined by feds whose arbitrary and sometimes capricious intervention threatens liberty and is wholly unwarranted.

Why This Matters

This case is about more than one person or one transaction. If the SEC can regulate every small business that raises money through personal networks, then nearly all local enterprise could fall under federal control. That would be a serious shift undermining both entrepreneurship and the Constitution’s design to limit centralized power.

By defending Blanchard, CIR is standing up for the principle that not every deal needs a federal regulator to second guess the transaction. This case is a chance to bring some much-needed clarity and restraint to how far federal agencies can go in the name of investor protection.