. Opponents, however, argued that the enactment of federal incorporation laws would infringe upon the traditional power of the states to regulate business within their own borders. A third group, in favor of compromise, suggested that Congress enact laws requiring the federal licensing of corporations engaged in interstate commerce, rather than the federal charter of such entities. Licensing would allow the federal government to regulate large corporations (protecting investors and the public) while avoiding infringement upon the states' powers.
The debate over federal incorporation laws continued even after the enactment of the Acts of 1933 and 1934. In the eight years leading up to the Second World War, several bills were introduced in Congress which would have created federal licensing regulations. The newly created Securities and Exchange Commission issued a report in 1938 which expressed alarm at the custom of "charter-mongering" by certain states. These states were more interested in raising revenue by freely granting corporate charters than in protecting investors. The report did not explicitly call for federal incorporation or licensing laws, but such a conclusion could be inferred from the findings of the report. Even more recently, commentators have suggested the enactment of federal incorporation laws to further protect investors.
Incorporation laws were one means of regulating the trading of securities by imposing certain disclosure requirements upon corporations. However, the federalist structure of the United States resulted in different incorporation laws in each state. A group of investors seeking to charter a corporation could choose the least restrictive jurisdiction in which to incorporate the new entity. Often, this jurisdiction would have few or no effective disclosure requirements and future investors would find out little about the company.
As noted in the first chapter of this paper, a se...