The Role of Blue Sky Laws After NSMIA and the JOBS Act

State securities laws—in particular, state laws requiring that securities offered by issuers be registered with the states—have been an impediment to the efficient movement of capital to its highest and best use. The pernicious effects of these laws—generally referred to as “blue sky laws”—have been felt most acutely by small businesses, a vital component of our national economy. It has been difficult to remedy this problem. States and state regulators have been tenacious in protecting their registration authority from federal preemption. The Securities and Exchange Commission, on the other hand, has been reluctant to advocate for preemption and unwilling to exercise its delegated power to expand preemption by regulation. In recent years some progress has been made toward a more efficient regulation of capital formation, principally as a result of some congressional preemption of state registration authority. Nonetheless, state registration provisions continue to impede significantly businesses’—especially small businesses’—efficient access to external capital. Further gains in efficient regulation of capital formation can be achieved but require actions both by states and the federal government. States must allocate more resources and effort toward vigorous enforcement of their antifraud provisions. At the federal level, Congress must preempt completely state registration authority. This duty of preemption falls to Congress, because the Commission has shown a sustained unwillingness to exercise its broad, delegated power to preempt state registration authority

The Plight of Small Issuers Under the Securities Act of 1933: Practical Foreclosure From the Capital Market

The thesis of this Article is simple: the Securities Act of 1933 does not work very well for small issuers, a premise which the Securities and Exchange Commission appeared to tacitly recognize in a series of announcements released early this year. Because of a combination of exorbitant costs, unmanageable levels of ambiguity, unworkable resale provisions and contamination caused by prior illegal sales of stock, a small issuer often is unable to comply with the 1933 Act. As a result it may be difficult or even impossible for a small issuer to raise capital by selling stock. There are obvious pernicious effects caused by this inability to exploit one form of financing. One such effect is that both the issuer and society may be denied the benefits of competition if the issuer is unable to secure the funds necessary for expansion. Although it cannot be seriously contended that alterations in the 1933 Act suddenly can turn around a faltering economy or interject meaningful competition in traditionally oligopolistic industries, the 1933 Act does unreasonably impede the capital formation that small businesses require in order to have any chance of competing with larger concerns. It should be made clear at the outset that the thesis of this Article is not that the 1933 Act never works smoothly and rationally for the small issuer. Occasionally a small issuer is able to meet the requirements of the 1933 Act without undue burden and with a reasonable degree of safety. Unfortunately, however, that is the exception and not the rule. More typically a small issuer is confronted with hyper-technical rules and interpretations that seem to have lost all contact with legitimate policy. The small company may also be faced with required procedures to which he simply cannot conform, and with pervasive vagueness that boggles the keenest legal minds

Definition of Control in Secondary Distributions

Section 2(11) of the Securities Act of 1933 (Act) generally subjects the sale of securities by a person controlling an issuer to the same rules that govern the sale of securities by an issuer. Accordingly, before a control person may sell the securities he holds in the controlled corporation he must either register them with the Securities and Exchange Commission (Commission) or qualify for an exemption from the registration requirement. While the Act clearly requires that a control person either register or qualify for an exemption, it fails to define control. Thus, the task of defining has fallen to the Commission and to the courts. To date, as evidenced by the apparent development of two definitions of control rather than one, their definitional attempts have largely failed to provide a selling shareholder with clear guidelines as to when he will be considered a control person. This article will initially discuss the two existing general definitions of control and suggest that only one of these definitions provides both an understandable and workable norm. Factors which the courts and the Commission have utilized in reaching a decision that a selling shareholder is a control person will then be isolated and examined in terms of their utility as general indices of control under each of the two definitions. Finally, two techniques to remedy the present lack of certainty will be suggested

John Edward Kennedy

This tribute was in recognition of John E. Kennedy’s death. John E. Kennedy was a member of the College of Law faculty

An Open Attack on the Nonsense of Blue Sky Regulation

The evolution of state securities laws (hereinafter blue sky laws ) in this country is a classic example of regulation that was, perhaps, initially justified and that was apparently promulgated with the best of motives, but which now is actually harmful to society. Today, blue sky laws are ineffective, philosophically unsound, and unnecessarily expensive, and they should be substantially eliminated. Because of the vested interests that have developed, however, it is unlikely that states will respond to this problem, and it will probably take action by the United States Congress to preempt the area. Such an action is appropriate and, indeed, is long overdue. The case for substantially eliminating state blue sky laws is based, fundamentally, on a cost-benefit analysis. This writer\u27s research, as reflected in this Article, uncovered no meaningful benefit to society from state regulation of securities. In the areas of disclosure and broker-dealer governance, for example, blue sky laws merely duplicate the federal requirements and as a result add no additional protection for investors. Where merit regulation is concerned, however, the regulatory scheme is harmful to society, even without considering the actual dollar costs of such regulation. Although the writer does not attempt any precise quantification of these dollar costs to society, the article does contain some information and observations about the level of expenditures generated by the enforcement of and compliance with state blue sky laws. The inference from this information leads one to the conclusion that blue sky laws exact a considerable tribute from society. For these reasons, the Article recommends that the blue sky laws be essentially eliminated