SEC to Consider Expanded Preemption of Blue Sky Registration Requirements

Bill Sjostrom —  8 March 2006

In 1996, Congress passed the National Securities Markets Improvement Act, which, among other things, amended Section 18 of the ’33 Act to provide that no state law, rule, regulation or order “requiring, or with respect to, registration or qualification of securities, or registration or qualification of securities transactions, shall directly or indirectly apply to a security that is a covered security or will be a covered security upon completion of the transaction.� Section 18 defines a covered security as a security listed or approved for listing on the New York Stock Exchange, the American Stock Exchange or admitted or approved for admission and trading on the Nasdaq National Market. Section 18 also gives the SEC the authority to expand to the definition of “covered security� to securities listed on a national securities exchange that the SEC determines has listing standards substantially similar to those of the NYSE, AMEX, and NMS.

On February 28, 2006, Nasdaq filed a petition with the SEC (click here) requesting that it add a security listed on the Nasdaq Capital Market (f/k/a Nasdaq SmallCap) to the definition of covered security. The SEC rejected the same request in 1998, but since then Nasdaq has enhanced the NCM’s listing standards. The SEC’s Advisory Committee on Smaller Public Companies supports the change, and more importantly, the North American Securities Administrators Association (the state blue sky regulator association) does not oppose it.

The NCM has the least stringent initial financial list requirements of the three Nasdaq market tiers. So if approved this move will relieve some smaller companies from having to deal with blue sky registration for their IPOs. It will also likely enable Nasdaq get some listings that otherwise would have gone to the AMEX.