A 1996 law preempted state review for four security categories

The record

On 11 October 1996 the president signed the National Securities Markets Improvement Act, Public Law 104-290. The enacted text added a new section 18 to the Securities Act of 1933 barring a state from requiring registration or qualification of a covered security. The statute defines four categories of covered security: securities listed or authorized for listing on a national securities exchange; securities issued by an investment company registered under the Investment Company Act of 1940; securities offered or sold to qualified purchasers as the Commission would define that term by rule; and securities sold in specified exempt transactions, including offerings under Securities Act sections 4(4) and 3(a) with listed exceptions. The same Act amended the Investment Company Act to define qualified purchaser, setting thresholds such as a natural person owning at least 5,000,000 dollars in investments, or an entity investing at least 25,000,000 dollars on a discretionary basis.

What the documents establish

The enacted text is the source for what was actually preempted, four named categories, not state securities regulation generally. States retained authority to require notice filings and fees for some covered securities, and to bring fraud enforcement, a carve-out the statute itself preserves. The current codification at 15 U.S.C. 77r restates the same four categories, and its own historical note confirms the October 1996 enactment; the section has since been amended further, including a later addition folding certain crowdfunding transactions into the covered-security definition, which this entry does not treat as part of the 1996 original. A description of the 1996 Act as simply ending blue-sky review should be read against this narrower, categorical text.

The operating read

This is an editorial reading beyond the statute. A startup relying on an exemption to avoid state-by-state securities filings should identify which of the four 1996 categories its offering actually falls under, since an offering that is not a nationally listed security, not a registered fund interest, not sold exclusively to qualified purchasers, and not within the named exempt-transaction categories may still face state registration review notwithstanding this Act. Founders sometimes treat the phrase federal covered security as a synonym for exempt from state law broadly; the statute ties the preemption to the specific category claimed, and a state can still require a notice filing and fee for some of those categories.

What to check before you decide

Before assuming an offering is preempted from state review, check which category is actually being claimed.

• Which of the four covered-security categories does counsel say the offering qualifies under, and does the offering in fact meet that category's conditions?
• Does the relevant state still require a notice filing or fee for that category, notwithstanding the registration preemption?
• Has the specific rule defining qualified purchaser, or the relevant exempt-transaction category, been amended since 1996 in a way that changes the analysis?

This is an editorial checklist; state and federal securities counsel, not this summary, should confirm which category applies to a specific offering.