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General Background of Securities Law in the United States.
Both the federal and state governments have adopted securities laws. The federal law started with
the Securities Act of 1933 ("Securities Act"), passed unanimously without debate after the stock market crash of 1929
led to the Great Depression. The next year the Exchange Act of 1934 was enacted to regulate stock trading. The
Securities Act primarily addressed the law regarding issuing stock. It approach was not to limit access to the market
by evaluating the merits of the offering, rather it would let the investor decide after full disclosure.
The states began enacting securities laws early in the 20th century. They were called "Blue Sky
Laws" because the politicians claimed that stock promoters selling stock that was little more than blue sky. The
political impetus of state laws was to prevent the selling of worthless securities. It therefore is generally a "merit"
approach. Under state law it is not always enough to give full disclosure, the issuer must also comply with "fairness"
rules. In most cases, an offering must comply with both federal and state securities laws.
In order to protect investors, the normal "caveat emptor" (buyer beware) was reversed to "seller
beware." The seller of a security (or fraudulent purchaser) has the duty to disclose all material facts. Usually investor
legal actions are by investors who thought they were buying a low risk security only to find out that it was in reality
State securities laws often provide the greatest protection to investors but require that the
security be returned and limit damages to the amount of the net investment plus an interest rate and possible