By Julius J. Brecht[1] For The AlaskaJournal of Commerce Have you been thinking of expanding your business and paying for it through a securities offering to new investors? Have you wondered who sets the rules for such an offering? Let's say you have owned and operated a small business in Alaska for some time. You used your own resources to get your business started. Now, you are ready to seek out new investors to assist in further capitalizing your company.

You are prepared to go beyond family in offering common stock in your company to prospective investors. That offering does involve an offer of securities.

The substantive requirements applying to your offering are extensive. However, at this point let's focus on two basic questions:

• Who regulates such an offering?
• Why do we have such regulation?

Securities regulation in this country is at two levels of government - one at the state level and one at the federal level. The first securities act was enacted by the State of Kansas in 1911. Within a few years, 23 other states had adopted similar acts. By 1929, almost every state had such an act.

Early on, state securities law became known as "blue sky law." This rubric may have emanated from early common usage in Kansas when laws were enacted to combat what had become a hunting ground of promoters of fraudulent enterprise. These rascals had become so bold that, it was said at the time, they would sell full ownership to building lots in the blue sky above.

As some of the schemes in the 1920s illustrated, state securities regulation, limited as it was by state jurisdiction, was not the full solution. The 1929 stock market crash caused public outcry and, in part, resulted in establishing several federal securities laws, including the Securities Act of 1933, as amended (Securities Act). The Securities Act, in part, specifically deals with offerings involving interstate commerce.

State securities regulation predated the Securities Act by 22 years. This timing helps to understand the scope of state and federal securities laws and how they interrelate.

When dealing with securities regulation, Congress or a state legislature must make three public policy decisions.

First, should the jurisdiction regulate the area at all? The alternative to government regulation is deference to a totally unfettered market.

In this country, the overwhelming decision has been for at least some government control. Presently, in addition to the Securities Act, each state and all American possessions have some form of securities regulation. In Alaska, the basis for that regulation is the Alaska Securities Act.

Second, what general areas are in need of securities regulation? These areas can include securities offerings, the professionals involved in such offerings, and fraud in offerings. The professionals include a broker-dealer, an agent for a broker-dealer, an agent for a securities issuer, an investment adviser and an agent for an investment adviser.

The areas of securities regulation can also include national market systems, continuous disclosure, and proxy solicitations. These latter three areas have become the almost exclusive purview of our federal government. However, the Alaska Securities Act sets forth unique regulatory powers relating to proxy solicitations involving Native corporations of at least a certain size. These are corporations authorized pursuant to the Alaska Native Claims Settlement Act of 1971.

The other three areas of securities regulation are shared between the federal government and the states. That is, most states (including Alaska) also regulate in the areas of securities offerings and the professionals involved in them, and fraud in offerings.

Third, what approach is to be used in securities regulation? One approach requires the securities or their offer to be registered or exempt from registration. The other requires registration of the company selling the securities.

In the latter approach, once the company is registered, it may make multiple securities offerings, regardless of volume sold. With limited exception, the State of New York follows this approach. The rest of the states (including Alaska) require registration or registration exemption of securities or their offer.

The form and approach to securities regulation under federal law was influenced by these activities on the state level. As a result, the Securities Act takes the approach of requiring registration or registration exemption of securities offerings.

Under the Alaska Securities Act, an offer and sale of securities must, with two limited exceptions, first be registered under the act before the offer is made. Under the first exception, the securities or their offer must meet one or more specific registration exemptions under the act. Under the second exception, the Securities Act preempts the registration provisions of the state act as applied to certain offerings.

Neither assertion of an exemption nor preemption of registration prevents access to the anti-fraud provisions of the Alaska Securities Act. That is, those provisions may nevertheless be exercised to protect the investing public.

Under the Securities Act, it is unlawful to offer and sell securities unless they are registered. The only exception to this requirement is that the securities or their offer meets one or more specific registration exemptions under the act.

A decided majority of states (including Alaska) have taken the approach of emphasizing public protection from schemes to defraud. From these state anti-fraud provisions, outlines of required offering disclosure have developed on which an offeror must prepare a disclosure statement in a given offering. The offering is made through that statement. A similar approach is taken under the Securities Act, including provision for numerous forms and specified disclosures in securities offerings.

With its focus on interstate offerings, the Securities Act scope is broad and touches on numerous transactions in the private and public market place. However, it, like the Alaska Securities Act, in essence requires full disclosure of all material facts related to a securities offering, regardless of whether the issuer satisfies the registration or registration exemption requirements of the respective acts.

Securities regulation under state and federal securities laws also takes the form of requiring registration, with limited exception, of a person through whom the offering is made. For example, an agent for an issuer of securities must, with limited exception, be registered under the Alaska Securities Act in assisting in a securities offering in Alaska.

Now you may say this history of securities regulation is all well and good. However, exactly what is a security? Securities laws enacted early in the past century did not include a definition. They simply assumed the word had common meaning.

The definition found in most state securities laws today (including the Alaska Securities Act) takes a cumulative approach. That is, the definition includes a large number of representative transactions and instruments. This approach is also taken in the Securities Act.

In the event your company offering is to be made to a person residing in a jurisdiction separate from Alaska, the offering becomes an interstate offering. In this instance, the offering must also satisfy the registration or registration exemption provisions of that other jurisdiction.

The prudent Alaska company carefully considers, before making an offer, the securities regulation requirements of this state, as well as the Securities Act. In the event the company considers an interstate offering, the securities regulation of the other states involved and that set forth in the Securities Act, as well as the provisions of the Alaska Securities Act, must be addressed before making the offer.

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