As we move into the Twenty-First Century, state blue sky laws and regulations continue to govern a significant portion of the capital formation activities of our domestic businesses. As a result, state administrators, influenced by their historically informed preferences and local traditions, continue to play important roles when businesses attempt to access external capital sources.

Today, however, the effects of state blue sky laws, regulations, and administrators on capital formation are felt almost exclusively by small businesses. The capital formation activities of larger businesses generally have been freed from state control, most recently by the preemption contained in the National Securities Markets Improvement Act of 1996 (NSMIA).

Although allowing states to retain control over smaller, local concerns while giving the federal government jurisdiction over larger, national enterprises may have a sensible ring to it, such a split system in fact is unsound. First, the system is inherently discriminatory against small businesses. When small businesses attempt to raise capital, they may be subject to more than fifty sets of laws and regulations, while larger corporations are subject to only one. Such discrimination is not only unfair to small entrepreneurs but also leads to inefficiencies and misallocations of societal resources. The increased transaction costs generated by complying with multiple securities regimes make small companies less competitive in relation to larger companies, even if the small companies have an equal or even superior product.

Three years of experience since the enactment of NSMIA demonstrates what most of us already understood: the states and the Securities and Exchange Commission are either unable or unwilling to move society to a single, unified, and balanced set of rules respecting capital formation. Only further Congressional intervention, therefore, can eradicate the insidious remnants of state control over capital formation.

The purpose of this Article is to argue that Congress, notwithstanding the significant problems illuminated by public choice theory and interest group analysis, should complete the work it started with NSMIA by entirely preempting state control over capital formation. Only in this manner is it possible to reach the goal of a modem, fair, and efficient regulatory scheme for capital formation.

Document Type


Publication Date

Summer 2000


Notes/Citation Information

Washington University Law Quarterly, Vol. 78, No. 2 (Summer 2000), pp. 407-434


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