State Securities

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In his paper, titled “The Role of Blue Sky Laws After NSMIA and the JOBS Act,” Rutheford B. Campbell, Jr. contends that state securities laws continue to impede capital formation.  Campbell urges that at the federal level Congress must preempt completely the state registration authority.  The National Securities Market Improvement Act of 1996, or NSMIA, did not result in full preemption.  NSMIA preempted state authority in connection with offerings of securities by mutual funds, offerings by companies the securities of which are traded on a national securities exchange, and exempt offerings made pursuant to Rule 506 under the Securities Act.  NSMIA delegated authority to the Securities and Exchange Commission to expand preemption by regulation in the case of any offering “to qualified purchasers, as defined by the Commission by rule.”  The definition of a qualified purchaser must be “consistent with the public interest and the protection of investors.”  The JOBS Act preempted state authority over crowdfunded offerings.  The Commission, in its final rules implementing amendments to Regulation A, preempted state registration authority over Tier 2 offerings.  As the author points out, many other securities offerings remain subject to state registration requirements, including registered offerings undertaken by issuers of securities that are not traded on a national exchange, private placements made pursuant to Section 4(a)(2) of the Securities Act, offerings made pursuant to Rule 504, Regulation A Tier 1 offerings, and intrastate offerings.  It is not clear why state securities registration is required in each of these cases.  For example, in the case of offerings that are made pursuant to a registration statement that has been reviewed by, and declared effective by, the Commission, state review does not add meaningfully to investor protection.  Perhaps if Congress does not take action, the Commission might consider exercising its delegated authority in connection with the harmonization of exempt offering alternatives that has been discussed by Commission representatives and which now appears on the Commission’s regulatory agenda.

Recent years have seen significant growth in Securities Act of 1933 (“1933 Act”) class actions filed in California state courts, based on conflicting readings of the jurisdictional provisions of the Securities Litigation Uniform Standards Act (“SLUSA”).  SLUSA was designed, among other things, to prevent certain state private securities class action lawsuits alleging fraud from being used to frustrate the objectives of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). However, the jurisdictional provisions of SLUSA proved to be vague and unclear, resulting in a circuit split.  Some courts had found that SLUSA covered class actions filed in state court alleging only 1933 Act claims must be heard in federal courts.  In Cyan, Inc. v. Beaver County Employees Retirement Fund, the Supreme Court unanimously held that state courts have jurisdiction over class actions that allege federal violations under the 1933 Act and defendants are not permitted to remove such actions from state court to federal court for lack of subject matter jurisdiction.  In Cyan, the Court was charged with interpreting the jurisdictional provisions of the SLUSA to determine the jurisdictions of such claims. Justice Kagan concluded: “SLUSA’s text, read most straightforwardly, leaves in place state courts’ jurisdiction over 1933 Act claims, including when brought in class actions.” Thus, the Court determined SLUSA did not strip state courts of jurisdiction over class actions alleging violations under the 1933 Act. Furthermore, the court concluded that SLUSA did not empower defendants to remove such actions from state to federal court. State courts will continue to exercise concurrent jurisdiction over class actions that allege federal violations under the 1933 Act.  The Supreme Court cured a circuit split and the decision may lead to more securities class actions alleging 1933 Act violations to be brought in state courts.