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Industrial Development Bonds And The Mystery Of Federal Preemption

This should be a straightforward question - Are qualification and registration requirements under state securities laws preempted with respect to industrial development bonds?

When Congress enacted the National Securities Markets Improvement Act of 1996, it preempted state qualification/registration requirements with respect to "covered securities" as defined.  Section 18(b)(4)(E) of the Securities Act of 1933 provides that a security is a "covered security" with respect to a transaction that is exempt from registration under  pursuant to Section 3(a) of the Securities Act.  Section 3(a)(2) is a long list of exempt securities (not transactions).  Buried in this list is "any security which is an industrial development bond (as defined in Section 103(c)(2) of the Internal Revenue Code of 1954)" meeting certain conditions.  So industrial development bonds meeting the conditions of Section 3(a)(2) are "covered securities", right?

The first complication is the reference to the "Internal Revenue Code of 1954".  It hasn't been called that since 1986 when Congress enacted the Tax Reform Act of 1986.  Significantly greater confusion is raised by the fact that the Tax Reform Act also removed the definition "industrial development bond" from Section 103 of the IRC. 

Note that Section 18(b)(4)(E) provides that a security exempt under Section 3(a)(2) is not a "covered security" with respect to the offer and sale of such security in the state in which the issuer of the security is located.  California has its own list of securities exempt from qualification under the Corporate Securities Law of 1968 in Corporations Code Section 25100.  Subdivision (a) exempts any security (including a revenue obligation) issued or guaranteed by the United States, any state and various other governmental entities and instrumentalities.  

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...