States can be a wonderful laboratory and platform for jurisdictional competition. But sometimes the laboratory seems to belong to Dr. Frankenstein and then federal law must step in to bring order.
Biff Campbell thinks Reg D has failed its intended purpose and the reason is state law. Here’s part of the abstract:
Regulation D * * * offers businesses — especially businesses with relatively small capital requirements — fair and efficient access to vital, external capital. * * * The data show that Regulation D is not working in the way the Commission intended or in a way that benefits society. The data reveal that companies attempting to raise relatively small amounts of capital under Regulation D overwhelmingly forego the low transaction costs of offerings under Rule 504 and Rule 505 in favor of meeting the more onerous (and more expensive) requirements of Rule 506. Additionally, these companies overwhelmingly limit their relatively small offerings to accredited investors, which dramatically reduces the pool of potential investors. This unintended and bad outcome is the result of the burdens imposed by state blue sky laws and regulations, and this has to a large degree wrecked the sensible and balanced approach of the Commission in Regulation D. Congress. . . could solve the problem by expanding federal preemption to cover all offerings made under Regulation D.
He has a point. Permitting the states to regulate national securities transactions enables individual states to impose regulatory costs outside their borders for the benefit of local interest groups. This can have perverse effects — in this case, by letting individual states impede national capital formation and entrepreneurship .Indeed, a key economic rationale for federal law is to address this problem. See Easterbrook & Fischel, Mandatory Disclosure for the Protection of Investors, 70 Virginia Law Review 669 (1984).
But we don’t have to eliminate state securities laws, along with state law’s potential advantages of competition and experimentation, to deal with this problem. There’s an alternative: apply state law only to intrastate transactions, or to corporations that have contracted for the securities law of a particular state (e.g., by incorporating in the state). In other words, apply the same choice-of-law rule to state securities law as to state corporate governance law. I discuss this approach in Dabit, Preemption and Choice of Law and Preemption and Choice-of-Law Coordination (with O’Connor).