Brief History of Securities Laws
The states got into the act first. Massachusetts enacted a law in the 1850s that regulated the sale of railroad stock. In 1911, Kansas adopted the first securities statute with a broad application to protect the welfare of its citizens from unscrupulous promoters of securities. A handful of states followed suit. There were constitutional challenges to these states regulation of securities that were defeated in 1917, which opened the way for the wholesale adoption of state regulatory controls. Today, each state has some form of securities regulation.
State securities laws were a great starting point in protecting investors from fraud and abuse, but something more was needed. Congressional hearings into the cause of the Great Depression uncovered that one-half of the total sales of securities during the 1920s proved to be worthless due to massive fraud, abuse of trust, and lack of disclosure standards. State regulation was largely ineffective due to lack of resources and the fact that people committing these crimes were moving from state to state to avoid getting caught.
One of the first things President Roosevelt did when he got in to office was to urge Congress to adopt legislation controlling the issuance and sale of securities. One of the first pieces of New Deal legislation was the Securities Act of 1933 (33 Act), which created the Securities and Exchange Commission (SEC) and instituted a process for federal registration of securities and an administrative process to review securities offerings.
Curiously enough, while other New Deal legislation created federal bureaucracies that supplanted state services, the creation of this new federal review mechanism of securities also left in place the existing state securities laws. This concurrent jurisdiction over securities created, in many cases, a dual registration process at the federal and state level that still exists today.
Since 1933, issuers of securities either had to register their securities or qualify for an exemption from registration. Securities registration is an expensive and time-consuming process. Rather than filing a public registration, most small companies use an exemption from registration provided, in part, by Regulation D of the 33 Act.