Securities regulation has probably been around about as long as securities have.

As early as the thirteenth century King Edward decreed that brokers in London should be licensed.

In the United States, although Massachusetts required the registration of railroad securities as early as 1852, and other states passed laws relating to securities in the late 1800’s and early 1900’s, the real push for securities regulation came from the Midwestern and far western states. Apparently investors in these areas of the country felt that they were being victimized by capitalists in the east.

In Kansas, in 1911, the first comprehensive securities law requiring registration of both securities and their salesmen was enacted. The Kansas law was a response to unwitting investors being taken by salesmen selling worthless interests in fly-by-night companies and gold mines all along the back roads of that state. It was reportedly said that no assets backed up those securities—nothing but the blue skies of Kansas. Thus the Kansas law was the first of the blue-sky laws. To this day, state laws regulating securities are known throughout the industry as blue-sky laws.

Unlike Statutes that had preceded it, the Kansas Act not only sought to prevent fraud in the general sale of securities, but also to bar the sale of the securities of any company whose organization, plan of business, or contracts included any provisions that were unfair, unjust, inequitable or oppressive, or if the investment did not promise a fair return. This is called merit review authority.

Within two years after enactment of the Kansas securities law, twenty-three states, including Wisconsin, had passed some form of blue sky legislation. Though resembling the modern laws in some respects, the early securities Statutes were crude by comparison. Most lacked entirely or included very few definitions, provided no logical scheme for exemptions from registration, and granted the administrator essentially unchecked discretion.

The new state laws were vigorously challenged on constitutional grounds. The first United States Supreme Court test of the state laws under the federal constitution came in 1917 when the Court upheld the securities laws of Ohio, South Dakota, and Michigan in three related cases. In one of these cases, Justice McKenna answered the criticism, heard yet today, that the blue sky laws create substantial roadblocks to capital formation:

We think the blue sky law is within the power of the State. It burdens honest business, it is true, but burdens it only that, under its forms, dishonest business may not be done. This manifestly cannot be accomplished by mere declaration; there must be conditions imposed and provision made for their performance. Expenses may thereby be caused and inconvenience, but to arrest the power of the State by such considerations would make it impotent to discharge its function. It costs something to be governed.

Although constitutional challenges continued, state securities laws were here to stay.

As early as 1929, there was an effort to bring uniformity to the state regulatory scheme with the adoption of the first Uniform Securities Act. It never became popular and was eventually repealed in 1944.

The great stock market crash of 1929 and the ensuing depression are generally credited with providing the impetus for federal securities legislation. The first major federal legislation enacted in reaction to the stock market crash was the Securities Act of 1933 (the ’33 Act). The ’33 Act, administered by the newly created Securities & Exchange Commission (the SEC ), provides for the registration of the initial distribution of most securities. During its consideration, some legislators wanted the law to take the form of the New York Fraud Law while others wanted it to provide the type of merit tests which are now found in some blue sky laws.

The original draft of the ’33 Act did contain merit tests, but they were deleted in the final draft. The law provides for full disclosure of all material facts. This sunlight theory of regulation is based on the assumption that if investors are given all of the necessary information they will make wise investment decisions. Commentators have characterized the ’33 Act as follows:

Congress did not take away from the citizen his inalienable right to make a fool of himself. It simply attempted to prevent others from making a fool of him.

As to its efficacy in regulating securities issuers, the sunlight theory may be summed up by a saying: Those who are forced to undress in public will presumably pay some attention to their figures.

The announced aim of Congress in passing the Securities Act was not only to inform investors of the facts concerning securities offered for sale and to protect them against fraud and misrepresentation, but was also intended to protect honest enterprise from crooked competition. It was hoped that the Act would restore investor confidence in the markets, freeing up capital for investment that was being hoarded because of investor timidity. This, in turn, would aid in providing employment and in restoring buying and consuming power.

This aim was to be achieved by a general antifraud provision and by a registration provision.

The antifraud provision was made applicable to the sale of all securities.

The registration provision was designed to place the facts before the investing public in two ways: First, adequate and accurate information in the form of a registration statement was to be made a matter of public record. Second, underwriters and dealers were to furnish prospective investors with a prospectus based on the information in the registration statement.

The registration statement would have to be declared effective before sales of the securities which were the subject of the prospectus could be made. Prior to that effective date, the prospectus can be used to solicit indications of interest if the caption preliminary prospectus and a standard warning about its preliminary nature appears on the cover in red ink. This preliminary prospectus has become known as a red herring, so called because it allows the brokers to go fishing for potential purchasers.

A system of dual regulation was clearly contemplated by the enactment of the ’33 Act. Congress deferred to the state laws, not only by choosing not to duplicate their merit review philosophy, but also by expressly preserving state regulation in the Act. This reservation of state jurisdiction in Section 18 of the Securities Act was broad and unequivocal:

Nothing in this Subchapter shall affect the jurisdiction of the securities commission (or any agency or office performing like functions) of any state or territory of the United States, or the District of Columbia, over any security or any person.

Over the next seven years Congress passed several more Acts pertaining to securities regulation.

• Securities and Exchange Act of 1934 — The primary thrust of the Act was to regulate the post-distribution trading of securities, including providing continuing information about issuers whose securities are traded in public marketplaces, remedies for fraudulent actions in securities trading and manipulation of the securities markets, regulating the use of insider information when purchasing securities, and regulation of the securities markets and the persons using such markets.
• Public Utility Holding Act of 1935 — Designed to correct abuses by holding companies with little or no assets and to prescribe accounting and recordkeeping requirements.
• Trust Indenture Act of 1939 — Provided protection for debt securities holders by requiring an indenture (trust agreement), administered by an independent financial-institution trustee.
• Investment Company Act of 1940 — Established requirements and regulated specific type of businesses, principally so-called mutual funds, which invest in the securities of other companies.
• Investment Advisors Act of 1940 — Required registration (licensing) for all persons engaged for compensation in the business of rendering investment advice or issuing analyses or reports concerning securities.

This framework of federal securities regulation has remained intact since that time.

In 1956, the states attempted once again to bring uniformity to their regulatory schemes. That year, the National Conference of Commissioners on Uniform State Laws (NCCUSL) approved the Uniform Securities Act. That Act has now been adopted in varying degrees in at least forty states. (Wisconsin adopted the 1956 Uniform Act on January 1, 1970). However, no state adopted the Uniform Act without change.

The Uniform Act’s purpose was to bring some consistency to state securities regulation, and to integrate that system as much as possible with the federal securities laws. One of the most important provisions with respect to the latter objective was a section that established a procedural coordination between the state and federal regulatory agencies through the use of simultaneous registration effectiveness (known as registration by coordination).

In October, 1996, Congress passed a bill titled The National Securities Markets Improvement Act of 1996 (NSMIA). That bill became law and extensively amended various provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940 and the Investment Advisers Act of 1940. Many of NSMIA’s provisions preempt portions of state securities laws.

In 2002, NCCUSL adopted an updated and modernized Uniform Securities Act of 2002 (USA 2002) following a several-year process of meetings and deliberations. Wisconsin adopted the USA 2002, with modifications, effective January 1,2009.