by Attorney David C. Grossack –
It is a rarely disputed axiom in national policy debates that government regulations often act as an impediment to economic activity. Whether or not there is good reason for the regulation does not obviate the inevitable goring of somebody’s ox.
Rarely discussed is the impact securities registration laws have had on the accumulation of individual wealth, class mobility, the creation of jobs, the development of new technologies or bringing new products or services to the marketplace.
In writing about the very wealthy, social commentator Ferdinand Lundberg observed that many had access to a kind of “super currency”. He was referring to publicly traded stock, inherited or otherwise, in family businesses, that they could sell at any time into the open market to pay for whatever they needed, whenever they needed it. 
That this position of comfort is restricted to a very small percentage of the nation’s, (and world’s) population is the result of perhaps several factors: ambition, luck, ingenuity, education and self-discipline, but also barriers to entry to the world of issuing stock created by a maze of regulations at the state and national levels.
Where did the world of corporations and stock begin? Historians point to the formation of a mining firm known as Stora Kapparberg in Sweden which issued its first share of stock in 1288 and received a charter from the king in 1347. The company still exists and is known as Stora Enso, a multinational conglomerate, which is one of the world’s largest companies today, and is now publicly traded.
The world’s first publicly traded company, however , did not emerge until the seventeenth century. It was chartered in 1602 as the Dutch East India Company or VOC. It was financed both by the selling of debt and equity instruments to finance voyages of merchant ships and lasted until 1800, after playing a major role in expanding Dutch political, economic, and even military influence around the world. It produced ample dividends for many years for its investors.
A British monopoly created ostensibly to trade with South America was founded in 1711 as a joint stock company popularly known as the South Sea Company became an early example of stock fraud and punishment.
The company was involved in a scheme to deal in government debt, buying government debt on insider knowledge and buying its own stock and pumping up its share price with the proceeds, while pretending to have a lucrative trade in South America. Eventually the company’s shares fell dramatically, wreaking havoc on investors and the entire British economy.
A parliamentary commission investigated the crisis and the gains of those who had engaged in fraud were confiscated by acts of parliament, though the principle architects of the scheme remained very wealthy. This led to legislation in England that halted unchartered joint stock companies, which began to emerge and reportedly engaged in fraud and rumor-mongering. A new law was enacted that they could only exist if they were chartered by parliament or obtained a Royal Charter. The companies had to pay a 300,000-pound fee for the privilege. The South Sea Company promoted the law to hamstring other companies seeking investment funds from the public.
In 1911 Kansas began to regulate the activities of companies wishing to issue securities, in what is referred to as the nation’s first “Blue Sky Law” because it supposedly regulated speculative schemes which have no more basis than so many feet of “blue sky”.
Blue sky laws require companies to file extensive disclosure statements in each state in which they wish to sell securities. The regulations, at both the state and federal level, propound the policy of “regulation by disclosure” and require highly detailed and intricate registration statements which require extremely expensive legal and accounting information, making it financially prohibitive for most entrepreneurs.
Many state stock regulators also administer a policy of ‘merit review’ allows the regulators to approve or disapprove a stock offering, depending on what they think of the company’s prospects and whether they think the company is a good investment for the public. If the company’s stock fails merit review, it can’t be sold in that state unless it passes several hurdles at the Securities and Exchange Commission in Washington.
As an indication of how competent the regulators have been, in 1980 a new computer company tried to get approval to sell its stock in Boston for $22 a share.
The Massachusetts securities regulators decided the stock was overpriced, and too risky for Massachusetts investors. Recently (2017) the stock was selling for about $120.00 a share after many stock splits(making the IPO price of $22 equal to $.39). You may have heard of it. It’s called Apple and is now the second largest company in the world, after ExxonMobil.
Not all states employ the merit review test. Some will be content with merely demanding that the stock issuer provide the registration statement. Those are called “full disclosure” states.
There have been analyses by economic and legal historians of why the Blue Sky laws emerged in the first place.
One is that banks did not want companies to get financed by stock sales.
When a company gets equity financing from the general public, there are no bank loans to repay and no interest payments to the banks.
Another hypothesis is that the smaller banks were, by promoting the passing of the Blue Sky laws, advancing the economic self-interest of the banks to have the public deposit their savings in those banks rather than buy stock with them. 
There have been historical analyses by reputable scholars who have observed that accounts of widespread stock fraud had been exaggerated to assist in the passage of the Blue Sky laws through no less than 47 state legislatures in the early 1900’s.
Eventually the legal theories behind the Blue Sky Laws became federal law when President Franklin D. Roosevelt obtained passage of the Securities Act of 1933 through the United States Congress. Essentially the law was designed to require very extensive disclosures of operating information and accounting information on a quarterly basis, as well as annual reports and detailed registration statements. Unless the sufficiency of the registration statement is approved by the Securities Exchange Commission, no stock may be sold by a public offering into the open market.
Nevertheless, despite the SEC’s vast police powers major frauds such as the Madoff Fraud, the Enron Accounting Fraud and dozens of others have plagued investors in recent years. The expense of SEC compliance often rises to hundreds of thousands of dollars, far beyond the means of the vast majority of American entrepreneurs or hopeful entrepreneurs.
Since the Sarbanes-Oxley law was enacted, some companies spend over $3 million a year in compliance. Sarbanes-Oxley is an enhanced regulatory process demanding increased internal controls and disclosures by publicly traded companies. After a series of accounting scandals it was made law.
Although provisions do exist for small offerings and exemptions, the SEC and the state Blue Sky System make this both hazardous and very expensive for small business, meaning most of them will never raise the capital needed to succeed. In fact, eighty percent of new businesses close within two years, usually due to the lack of capital.
Especially important to understand is that criminal proceedings against people who unintentionally violate securities laws are common. Federal prosecutors need not prove any “scienter” or criminal state of mind.
As one observer has written, merely coming to the attention of the SEC results in six figure legal bills, damages stock prices and destroys company morale.
In 2016, every SEC action is quickly found on Google, forever tarnishing the reputation of any subject of SEC enforcement action or investigation, whether guilty or innocent.
The history of abusive practices by the SEC is long and frightening.
Financial World, was our nations oldest business magazine until it ceased publication in 1998.
Robert Weingarten, the publisher stated in the February 15, 1981 issue:
“Anyone who reads knows that investigations are constantly leaked to the press causing damage to executives and companies. In many instances, the commission later drops the investigation, or brings suit and loses, but the stigma remains permanent”.
“With unbridled subpoena power, disregard for rules of evidence in their hearings and excursions into areas not covered by their mandates, the SEC Enforcement division has come to be an almost fascistic enclave operating outside our constitutional protections”.
“Add to all of this, copious rules and regulations that hamper rather than help our capital-raising mechanisms and it’s clear that reform is urgently needed.”
This was in 1981, 35 years ago. Nothing has changed.
A company cannot even give away stock to the public if it is not registered.  Arguments can be made against the constitutionality of the Securities Act of Perhaps the best argument that can be made is that it is “void for vagueness”.
The 1933 Act is 93 pages of legalese loaded with lots of repeated use of words like “thereof” or “under authority” of subsections(a),(b),(c), or (d) or “telegraphic notice”.
In other words, it is written in language that lawyers and accountants can only pretend they understand. When a statute is “void for vagueness” it means it violates a constitutional rule under the 14th and 5th amendments that requires criminal laws(and yes, the 1933Act has lots of criminal penalties) to be written in such a way that people can understand them. Not meaning lawyers and accountants, but people of average intelligence. (See California Law Review, May 1994 Volume82, Issue 3″Void for Vagueness”. Kolender v. Lawson, 461 US 352 (1983).
As for state Blue Sky Laws it boggles the mind why the Contract Clause of the US Constitution does not nullify this entire labyrinth of regulation. It simply prohibits the states from passing any law that impairs the obligation of contracts (Article I, section IV, clause 1).
Thus far courts have refused to invalidate “intrastate” merit review regulation claiming it does not burden interstate commerce. See Hall v. Georger- Jones Co., 242 US 539(1917).
Blue Sky laws also illegally impact the regulation of interstate commerce, which is the constitutional mandate of the federal government.
Blue Sky compliance, in addition to SEC compliance adds multiple legal bills, multiple risks of enforcement action and regulation that make small businesses who try to enter this world victims.
Ultimately society itself becomes the victim of this overregulation of commerce. Simple common-law remedies of fraud and deceit could be used to both civilly and criminally resolve fraud. Large bureaucratic institutions such as the SEC have developed a self-perpetuating, self-justifying culture that makes it chronically adversarial to the private sector. Roberta Karmel, a former SEC commissioner, has stated as much in her book Regulation by Prosecution, Simon & Schuster (1982).
In a shrinking economy where jobs are going overseas and technological innovation is increasingly the province of foreign research, wouldn’t a re-examination make sense?
Attorney Grossack is in private practice in Newton, Massachusetts. In 1999 he was named Lawyer of the Year by Massachusetts Lawyers Weekly for his constitutional litigation. He serves as General Counsel of National Writers Syndicate and may be reached by email at email@example.com or (617)-965-9300.
The Rich and the Super-Rich, Ferdinand Lundberg, Lyle Stuart(1968) The Corporation, Wesley Truitt, Greenwood(2006)
 The Dutch East India Company, Gaastria, Wahlburg (2003)
 The First Crash, Richard Dale, Princeton University Press (2014)
 The Origins of Blue Sky Laws: A Test of Competing Hypothesis, Paul Mahoney, Journal of Law and Economics Vol. 46, No.1.
 Survey Finds Sox Compliance Exceeds Estimates, Euromoney, March 22, 2005.
 “Time For Reform” Robert Weingarten, Financial World, Feb 15, 1981.
 In the Matter of Universal Science.com, SEC Release 7879/August of 2000.