Blue Sky laws are state securities laws that are designed to protect investors against fraudulent sales practices and activities. These state laws vary from jurisdiction to jurisdiction and are in addition to the federal securities laws (not in place of). State regulatory agencies oversee the enforcement of Blue Sky laws. To locate your regulator, check out this list from North American Securities Administrators Association (NASAA).
Although the name is catchy, Blue Sky laws are not new. In fact, the implementation of Blue Sky laws started with a Supreme Court decision in 1917, Hall v. Geiger-Jones Co. In 1956 Congress enacted the Uniform Securities Act of 1956 which most states have adopted into their Blue Sky laws. The most significant provisions of the Act include:
- Reason for existence. The securities issuer must engage in a real business with a reason for existence. Not a business that is bankrupt, a blind pool, blank check, or shell company.
- Price. The security price must be reasonable in comparison to its market price.
- Asset base. The securities issuer owns a minimum amount of assets.
- Unsold allotment. The security is not related to any unsold allotments given to a securities dealer who has underwritten the security.
In summary, a securities issuer cannot market a company’s stock for sale, unless it is in compliance with both local state and federal SEC regulations.
Securities Offerings
Most state laws typically require companies that make securities offerings to register the offerings before they can be sold in a particular state, unless a specific state exemption applies to the company’s offering. Covered securities are exempt from Blue Sky laws. Covered securities, as defined by National Securities Market Improvement Act of 1996, include:
- Securities listed (of approved for listing) on NYSE, AMEX, and NASDAQ
- Securities of the same issuer which are equal in rank or senior to such listed securities
- Mutual fund shares
- Securities sold to certain qualified purchasers (not yet defined by SEC)
- Securities exempt from registration under the Act if sold in transactions complying with Rule 506 of Regulation D
As a reminder, these laws vary from state-to-state, so always consult your securities lawyer to understand whether or not an exemption applies to your securities offering. For example, some states require proof of exemption, and charge a filing fee. Never assume you meet and exemption because there are extreme consequences for failing to comply with the securities laws.
To best understand your state filing requirements, NASAA provides a breakdown of filing requirements by state and includes links to each state regulator’s website.
Of course, we recommend you also consult with a securities attorney to ensure you complete and file the required paperwork correctly. If you are able to locate your requirements ahead of time, you might save some attorneys fees by organizing your requirements, and thus, lessening the amount of time the attorney has to research your fact-specific securities offering requirements.
Brokerage Licensing
In addition to securities offerings, the laws also license brokerage firms, their brokers, and investment adviser representatives. The state may also require additional certification from the brokers.
Still not sure what securities are? Not to worry, keep reading and check out our blog post on “Why Should I Care About Securities Laws?“
