In the United States, the U.S. Securities and Exchange Commission regulates and enforces the federal securities laws. But, the regulatory buck does not stop there. Each state in the Union has its own securities regulator that enforces its respective securities laws (sometimes referred to as “blue sky” laws). With limited exceptions, companies must comply with both federal and state securities laws and regulations in the states where they offer and sell securities (typically, this includes states where offerees (i.e., recipients of offers) and investors are based).
The exceptions from the general rule come into play by virtue of Section 18 of the Securities Act of 1933. This provision was adopted by Congress in Title I of the National Securities Markets Improvement Act of 1996 (“NSMIA”). Title I of the NSMIA was enacted to promote efficiency and capital formation in the financial markets. It effectively realigned the respective responsibilities of federal and state securities regulators in the context of the dual securities offering registration system that had existed up until that point. NSMIA achieved this regulatory realignment by amending Section 18 of the Securities Act to provide for exemption from state law registration and qualification requirements for certain categories of securities, defined as “covered securities.”
In short, companies that sell “covered securities,” as that term is defined by statute and any SEC rules interpreting it, are not required to be registered or qualified by state securities regulators. Nevertheless, in such circumstances, states retain their authority to investigate and bring enforcement actions for fraud, impose state notice filing requirements, and collect state fees. State securities regulators are within their authority to suspend the offer or sale of securities within their jurisdiction for a company’s failure to file, or pay filing fees regarding, an offering. Companies should contact state securities regulators in the states in which they intend to offer or sell securities for further guidance on compliance with state law.
The following types of securities, among others, are considered to be “covered securities” for purposes of Section 18 of the Securities Act:
- securities that are listed on a national securities exchange; and
- securities issued in exempt offerings under any of Regulation Crowdfunding, Tier 2 of Regulation A, or Rule 506(b) or Rule 506(c) of Regulation D.
Interested in reading more about the history of state and federal securities laws? You may find these resources from the North American Securities Administrators Association (NASAA) and SEC Historical Society useful.