| Blue Sky |
State securities laws
are called "Blue Sky" laws because they were enacted to
protect investors against promoters who would "sell the blue sky
itself." |
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Federal Preemption of State Law
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State securities laws
have recently been preempted in part by the National Securities Market
Improvement Act of 1996 (NSMIA). NSMIA preempts state regulation of
"covered securities."
Covered securities include: "nationally traded securities,"
securities sold to certain qualified purchasers, and under certain
exemptions. |
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Some issues still covered
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The following still must
register with the states: |
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NASDAQ Small Cap and OTC
BB securities |
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Reg A securities |
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Private placements under
Reg D, Rules 504 and 505 |
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Coordination, Notification
and Qualification
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Established companies
generally needed only notify state securities regulators that they are
making an offering. This is offering by notification. This was largely
pre-empted by the NSMIA of 1996. |
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Companies making SEC
registered offerings can generally register with states without having
to undergo detailed review. This is is called registration by
coordination (with the SEC registration). |
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In other cases,
companies have to undergo detailed review, The offering will not be
allowed unless the offering meets certain standards thought to insure
the offering has merit -- so-called merit review. This is registration
by qualification. |
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Merit Review
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The standards for merit
review vary from state to state. In general the standards used regulate
the relationship of price to book value, limit cheap stock given to
promoters, requirement promoters to escrow stock for years or until the
company has earnings, escrow proceeds until a substantial portion of the
offering is sold, require certain coverage ratios for interest on debt
or dividends on preferred stock and other rules. |
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Merit review can be a
substantial problem for many small issuers. |
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