The California securities law originated in 1913 from a populist movement that embodied a paternalistic attitude toward the protection of investors. It was characterized by the registration of offerings of securities with few exemptions and exclusions, a qualitative review of the merits of those offerings and an administrator with broad authority to implement and enforce the law. While the California securities law is still based on merit review, exclusions and exemptions have been added and expanded over the years by the California legislature and securities regulators. More recently, Congress has preempted state registration and merit review of various securities and transactions and this has been implemented and expanded by administrative action.
These developments raise a question as to whether it is time to consider a change in the method of regulating securities offerings in California and, in that connection, to determine whether the system of merit review has outgrown any usefulness it may have had originally. In my view, addressing this issue requires an empirical analysis of the regulation of securities offerings in California and its evolution over the past century.
The analysis begins in Part II with an overview of the history of the California securities law focused on issuer transactions from 1913 to the comprehensive revision of the law in 1968. This is followed in Part III by a more in-depth review and chronology of changes in the law and practice from 1917 to the present pertaining to each of three types of issuer transactions: private stock offerings, real estate syndications, and public stock offerings. Included are developments in the federal securities law and actions taken by self-regulatory organizations that have had an impact on the regulation of these transactions in California. To put this in perspective, the review of each type of issuer transaction is preceded by a brief history of capital formation pertaining to that transaction.
Part IV presents data showing the number and types of securities offerings in California for which notices of exemption or applications for qualification by coordination, notification or permit have been filed with the Department. With this background, the rationale for revisiting the method of regulating the offer and sale of securities and the system of merit review in California is set forth in Part V.
In conclusion, I believe it is time to change the method of regulating the offer and sale of securities in California in a manner that would include eliminating or limiting the system of merit review, with a view to enhancing the antifraud enforcement of the California securities law. Several courses of action are explored to accomplish that result.
Neal H. Brockmeyer, Regulation of Securities Offerings In California: Is It Time For a Change After a Century of Merit Regulation?, 54 Loy. L.A. L. Rev. 1 (2020).