​​​​​​​​Securities regulation has probably been around for as long as securities​ have existed.

 

As early as the thirteenth century, King Edward decreed that brokers in London should be licensed.

In the United States, although Massachusetts required the registration of railroad securities as early as 1852, and other states passed laws relating to securities in the late 1800's and early 1900's, the real push for securities regulation came from the midwestern and far western states. Apparently, investors in these areas of the country felt that they were being victimized by capitalists in the east.

In 1911 in Kansas, the first "comprehensive" securities law requiring registration of both securities and their salesmen was enacted. The Kansas law was a response to unwitting investors being taken by salesmen selling worthless interests in fly-by-night companies and gold mines all along the back roads of that state. It was reportedly said that no assets backed up those securities--nothing but the blue skies of Kansas. Thus, the Kansas law was the first of the "blue sky laws." To this day, state laws regulating securities are known throughout the industry as blue sky laws. 

Unlike statutes that preceded it, the Kansas Act not only sought to prevent fraud in the general sale of securities, but also to bar the sale of the securities of any company whose organization, plan of business, or contracts included any provisions that were "unfair, unjust, inequitable or oppressive," or if the investment did not "promise a fair return." This created "merit review" authority.

Within two years after enactment of the Kansas securities law, 23 states, including Wisconsin, passed some form of blue sky legislation. Though resembling the modern laws in some respects, the early securities statutes were crude by comparison. Most lacked entirely or included very few definitions, provided no logical scheme for exemptions from registration, and granted the administrator essentially unchecked discretion. 

The new state laws were vigorously challenged on constitutional grounds. The first United States Supreme Court test of the state laws under the federal constitution came in 1917 when the Court upheld the securities laws of Ohio, South Dakota, and Michigan in three related cases. In one of these cases, Justice McKenna answered the criticism, heard yet today, that the blue sky laws create substantial roadblocks to capital formation:

"We think the blue sky law is within the power of the State. It burdens honest business, it is true, but burdens it only that, under its forms, dishonest business may not be done. This manifestly cannot be accomplished by mere declaration; there must be conditions imposed and provision made for their performance. Expenses may thereby be caused and inconvenience, but to arrest the power of the State by such considerations would make it impotent to discharge its function. It costs something to be governed."

Although constitutional challenges continued, state securities laws were here to stay.

As early as 1929, there was an effort to bring uniformity to the state regulatory scheme with the adoption of the first Uniform Securities Act. It never became popular and was eventually repealed in 1944.

The great stock market crash of 1929 and the ensuing depression are generally credited with providing the impetus for federal securities legislation. The first major federal legislation enacted in reaction to the stock market crash was the Securities Act of 1933 (33 Act). The 33 Act, administered by the newly created U.S. Securities and Exchange Commission (SEC), provides for the registration of the initial distribution of most securities. During its consideration, some legislators wanted the law to take the form of the New York Fraud Law while others wanted it to provide the type of merit tests which are now found in some blue sky laws.

 

The original draft of the 33 Act did contain merit tests, but they were deleted in the final draft. The law provides for full disclosure of all material facts. This "sunlight theory of regulation" is based on the assumption that if investors are given all of the necessary information, they will make wise investment decisions. Commentators have characterized the 33 Act as follows:

The announced aim of Congress in passing the Securities Act was not only to inform investors of the facts concerning securities offered for sale and to protect them against fraud and misrepresentation, but also to protect honest enterprise from crooked competition. It was hoped that the Act would restore investor confidence in the markets, freeing up capital for investment that was being hoarded because of investor timidity.  This, in turn, would aid in providing employment and in restoring buying and consuming power.

 

This aim was to be achieved by a general antifraud provision and by a registration provision.

 

The antifraud provision was made applicable to the sale of all securities.

 

The registration provision was designed to place the facts before the investing public in two ways: First, adequate and accurate information in the form of a "registration statement" was to be made a matter of public record. Second, underwriters and dealers were to furnish prospective investors with a prospectus based on the information in the registration statement.

The registration statement would have to be declared effective before sales of the securities which were the subject of the prospectus could be made. Prior to that effective date, the prospectus can be used to solicit indications of interest if the caption "preliminary prospectus" and a standard warning about its preliminary nature appears on the cover in red ink. This preliminary prospectus has become known as a "red herring," so called because it allows the brokers to go fishing for potential purchasers.

 

A system of dual regulation was clearly contemplated by the enactment of the 33 Act. Congress deferred to the state laws, not only by choosing not to duplicate their "merit review" philosophy, but also by expressly preserving state regulation in the Act. This reservation of state jurisdiction in Section 18 of the Securities Act was broad and unequivocal:

 

Over the next seven years Congress passed several more Acts pertaining to securities regulation.

 

This framework of federal securities regulation has remained intact since that time.

In 1956, the states attempted once again to bring uniformity to their regulatory schemes. That year, the National Conference of Commissioners on Uniform State Laws (NCCUSL) approved the Uniform Securities Act. That Act has now been adopted in varying degrees in at least 40 states. (Wisconsin adopted the 1956 Uniform Act on January 1, 1970). However, no state adopted the Uniform Act without change.

 

The Uniform Act's purpose was to bring some consistency to state securities regulation, and to integrate that system as much as possible with the federal securities laws. One of the most important provisions with respect to the latter objective was a section that established a procedural coordination between the state and federal regulatory agencies using simultaneous registration effectiveness (known as registration by coordination).

In October 1996, Congress passed a bill titled "The National Securities Markets Improvement Act of 1996"  (NSMIA). That bill became law and extensively amended various provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940, and the Investment Advisers Act of 1940. Many of NSMIA's provisions preempt portions of state securities laws.

In 2002, NCCUSL adopted an updated and modernized Uniform Securities Act of 2002 (USA 2002) following a several-year process of meetings and deliberations. Wisconsin adopted the USA 2002, with modifications, effective January 1, 2009.

Wisconsin adopted its first blue sky law in 1913 when a regulatory agency was formed as part of the Railroad Commission. In 1939, the Wisconsin Legislature created a separate office, the Securities Commissioner's Office.

 

On January 1, 1970, Wisconsin adopted its own version of the Uniform Securities Act. The focus of that Act was Wis. Stat. s. 551.21, which states: "It is unlawful for any person to offer or sell any security in this state unless it is registered under this chapter or the security or transaction is exempted." Thus, any offer or sale of securities in Wisconsin is regulated through the provisions of the Wisconsin Uniform Securities Law, Ch. 551 of the Wisconsin Statutes and under Chapter DFI-Sec of the Wisconsin Administrative Code​.

That law continued to evolve through legislative changes and through the rule-making authority of the Commissioner of Securities. Under that law, Wisconsin was one of the "merit" states, requiring that a securities offering be fair and equitable, in addition to providing for full disclosure. However, on June 7, 1996, the Wisconsin Law was amended to eliminate the "unfair and inequitable" language. Shortly thereafter, the Office of the Commissioner of Securities became the Division of Securities in the newly created Department of Financial Institutions (DFI). The focus of the registration process for securities offerings in Wisconsin by the division thus became "full disclosure," just as it is at the federal level. However, if a registration is filed with the SEC and the division and it receives full review by the SEC, no further review is conducted by the division. That eliminates the perceived overlapping federal/state roadblock to capital formation. Many of the offerings now filed with and reviewed by the division have not been filed with the SEC. Those offerings include, but are not limited to, offerings by not-for-profit entities, and intrastate offerings.

On January 1, 2009, 2007 Wisconsin Act 196 became effective and replaced the former Wisconsin Uniform Securities Law, adopted in 1970, with the updated and the modernized Uniform Securities Act of 2002.

The legislation adopted the updated USA 2002, with certain modifications recommended by the State Bar of Wisconsin's Uniform Securities Act Study Group (which included several members of the Division of Securities of the Wisconsin Department of Financial Institutions), following an extensive three-year review process. The modifications principally consisted of adding to the USA 2002 several provisions from the existing Wisconsin Securities Law that had been developed over the years, and which the State Bar Study Group determined were important to be preserved in the revised Wisconsin Securities Law.

The regulatory concern with full disclosure is addressed in part by the registration requirements and exemption provisions contained in the Wisconsin Securities Law. To conduct an offering, it is often required that an application or notice be filed with the division. The filing requirements depend on the registration or exemption provision relied upon. In some cases, the filing requirements may be minimal. In other cases, it will be necessary to file a disclosure document, typically called a "prospectus" or "offering circular", and various exhibits. Regardless of an issuer's filing requirements (even if there are none), the "anti-fraud" provisions of the Wisconsin law are applicable to every securities transaction in this state, and that law requires all material facts regarding the issuer and the offering to be disclosed to prospective investors.

 

The division has also cooperated with other states in easing the regulatory burden on small businesses by participating in the national Coordinated Equity Review Program, an effort on the part of the North American Securities Administrators Association (N​ASAA)​ to streamline review of SEC-registered equity securities that do not qualify as covered securities​.