State blue sky laws—state laws that regulate a company’s offer and sale of securities—are a substantial barrier to businesses’ efficient access to external capital. The registration provisions in state blue sky laws have been especially harmful to small businesses, a vital component of our economy that may account for 30% of the nation’s employment. The costs associated with complying with more than fifty separate and independent obligations to register securities often exceed what small businesses can pay and thus may foreclose small businesses from the capital market. At the same time, requiring small businesses to comply with multiple registration regimes generates no material benefit in improved efficiency or, indeed, for society generally.

It has been difficult to remedy this problem. State regulators have waged an aggressive campaign to limit preemption, and the Securities and Exchange Commission has refused to promote preemption or exercise its delegated authority to expand preemption. There has been some federal legislative preemption of state registration authority, but that remedy so far has been inadequate and incomplete.

Improvement in the access of small businesses to external capital requires congressional action that preempts entirely state registration authority. That would leave small businesses to face a single, federal registration regime and investors protected by that federal registration regime and by state and federal antifraud provisions. Congressional action is required, since history shows that neither states nor the SEC can or will fix the problem.