Laws regarding the sale of securities may be understood as responses to perceived bargaining failures. The most extreme examples of these bargaining failures are seen in instances in which investors are intentionally misled or defrauded regarding the quality of the investments they receive for their money. Even without the presence of such culpability, however, bargaining failures are likely anytime the trading parties lack sufficient, accurate information necessary to effect value-enhancing trades. When that occurs in trades for capital, the parties to the transaction are misinformed respecting the trade, expectations are not protected, and that precious commodity, capital, may be turned over to entrepreneurs who are not its most efficient utilizers.
Society's securities laws impose mandated regimes designed to deal with these bargaining failures in trades for capital. The laws are intended not only to reduce culpable conduct, such as fraud, but also to improve more generally the bargaining for capital.
Society, however, has offered up quite different prescriptions to deal with these matters. The federal government, which entered the securities regulation business well after the states, impounded a disclosure philosophy in the Securities Act of 1933 (the 1933 Act). Under that regime, an issuer is legally entitled to sell any security, no matter how horrible or overpriced the security, so long as the issuer complies with the 1933 Act's disclosure requirements. In some instances, those disclosure requirements obligate the issuer to provide the Securities and Exchange Commission (the Commission or the SEC) and investors with prescribed information in connection with the public offer and sale of securities. In other instances, the information is disclosed only to investors and not the Commission, and sometimes in those cases the requirement for disclosure is stated only as the general obligation to disclose all "material" information, instead of a more particularized obligation to disclose enumerated information.
Contrasted to the federal disclosure regime of the 1933 Act, the states adopted securities statutes (blue sky laws) that require offerings to comply with certain substantive standards, and if the offerings fail to meet those standards, the securities cannot be sold in the particular state, even if all material facts are disclosed. These state qualification regimes or merit requirements work much like consumer legislation by prohibiting sales of securities that are considered by regulators to be defective. To implement the enforcement of their substantive standards, states' merit qualification statutes require informational filings by issuers with state agencies as a way to enable regulators to determine if the issue is in compliance with the particular state's merit standards.
Late in 1996, Congress enacted and the President signed into law the National Securities Markets Improvement Act of 1996 (the NSMIA or the Act). The NSMIA may seem to go a long way toward the remedy suggested eleven years ago, if one were to judge by the congressional rhetoric accompanying the consideration and passage of the act. In reality, however, the NSMIA as passed is a paltry response to the problems generated by state registration and merit qualification requirements.
The purpose of this Article is to provide an analysis of the Act and to offer harsh criticism upon the unfortunate circumstance that the Act, standing alone and without further action by the Commission, eliminates relatively few of the unjustified costs and little of the drag on capital formation generated by blue sky laws. The lament of this Article is especially strong and the criticism especially harsh as concerns the plight of small entrepreneurs, which is the segment of the economy that most needs relief from the oppressive pall of state regulation and, ironically, is the very segment of the economy that received the least help from the Act.19 Finally, this Article observes that the Act delegates to the Commission authority to interject vitality into the Act, especially as concerns the legitimate capital formation needs of small issuers. Ultimately, however, the author is doubtful of the Commission's will to take effective action in that regard.
Rutheford B Campbell, Jr., Blue Sky Laws and the Recent Congressional Preemption Failure, 22 J. Corp. L. 175 (1997).