Blue Sky Law


Also found in: Dictionary, Thesaurus, Financial, Wikipedia.

Blue Sky Law

A popular name for state statutes providing for the regulation and supervision of Securities offerings and sales, to protect citizen-investors from investing in fraudulent companies. Most blue sky laws require the registration of new issues of securities with a state agency that reviews selling documents for accuracy and completeness. Blue sky laws also often regulate securities brokers and salespeople.

Almost all states have adopted blue sky laws, regulating the sale of securities—investments in bonds, mutual funds, limited partnerships, and so forth. These laws acquired their name as early as 1917, when the Supreme Court issued a decision on "speculative schemes which have no more basis than so many feet of 'blue sky'" (Hall v. Geiger-Jones Co., 242 U.S. 539, 37 S. Ct. 217, 61 L. Ed. 480).

Blue sky laws place requirements on corporations and securities dealerships that offer investments for sale to the public in a particular state. These laws are in many cases adopted from the Uniform Securities Act, and are usually enforced primarily by the state's attorney general's office. The federal Securities and Exchange Commission (SEC) enforces federal laws that concern foreign and interstate transactions.

State blue sky laws require corporations to register securities before selling them so that regulators can check their marketing information for accuracy. National on-line computer networks that became widely available in the mid-1990s posed new problems for states trying to enforce these requirements. Texas, Ohio, and New Jersey were among states that by 1995 had begun prosecuting some of the thousands of dealers who were offering unregistered investment opportunities to small investors on computer bulletin boards.

State laws usually require corporations to file financial information, and can deny corporations the privilege of doing business if their profile or history is risky. State investigators can determine whether a corporation's financial structure allows it to sell certain securities.

The laws also spell out the qualifications of brokers, dealers, salespeople, investment advisers, and others who work in the securities business. They require dealers to identify the type of investments they are planning to sell and where.

Among the activities blue sky laws seek to prevent are hard-sell tactics. Telephone "stock-peddling" techniques that are high-pressure and misleading can result in the suspension of a broker's license. A 1992 survey by Louis Harris and Associates indicated that more than one-third of all U.S. citizens had received a phone call about investing, and five percent had made a purchase. Many states now require that brokerages and corporations selling on the public market also provide a printed prospectus that describes the risks of investing.

What happens when blue sky laws do not work? States often provide an avenue for victims of illegally sold securities to try to recover their money, sometimes in addition to criminal prosecution. Investors can charge Misrepresentation or lack of suitability and can demand restitution from the Broker in arbitration. class action suits can also be filed against a fraudulent brokerage or corporation.

Further readings

CCH Editorial Staff. 1999. Blue Sky Law Desk Reference. Chicago, Ill.: CCH Inc.

Maynard, Therese H. 1997. "The Future of California's Blue Sky Law." Loyola of Los Angeles Law Review 30 (June): 1573–98.

Shade, Joseph. 1997. "Financing Exploration: Requirements of Federal and State Securities Laws." Natural Resources Journal 37 (summer): 749–83.

Slobodzian, Joseph A. 1999. Third Circuit Upholds Blue Sky Law." The National Law Journal 20 (February 1): B4.

Cross-references

Securities; Stock.

References in periodicals archive ?
The focus of this Article is on blue sky laws. These are the state laws that most directly impact capital formation.
Plaintiffs are increasingly seeking relief under state Blue Sky laws, (87) many of which contain the same elements of and defenses to aiding and abetting liability as do state common law claims.
Part II illustrates how these dynamics will continue to change the boundaries of federal securities regulation in three illustrative areas: (i) state securities regulation, or so-called blue sky laws; (ii) the scope of the Securities Act of 1933; and (iii) municipal securities regulation.
The preferred equity and the new notes have not been registered under the Securities Act of 1933, as amended or the securities laws of any state or other jurisdiction, and, unless so registered, may not be offered or sold in the United States absent registration or an applicable exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and other applicable state securities or blue sky laws and foreign securities laws.
Blue Sky laws are state securities laws that regulate the sale of securities to protect investors from fraud.
The notes will not be registered under the Securities Act of 1933, as amended or the securities laws of any state, and may not be provided or sold in the United States absent registration or an applicable exemption from the registration requirements under the Securities Act and applicable state securities laws or blue sky laws and foreign securities laws.
SECLaw.com includes helpful and easily understood introductory articles on federal securities laws, blue sky laws (state securities laws), private placements, the initial public offering process, insider trading, and securities arbitration.
1970), specifically the per-investor limits and the preemption of blue sky laws. However, the revised CROWDFUND Act appears to appropriately address those concerns, though the House language still provides the best scenario for small businesses wishing to raise capital over the internet.
Since SCDs are usually not considered securities, they fall outside of the registration requirements imposed by each state's blue sky laws. Further, under the National Securities Markets Improvement Act of 1996, federal law preempts the application of blue sky laws to certain categories of securities, known as "covered securities." Included in the definition of "covered securities" are certain securities exempt under Section 3 of the 1933 Act.
"But recent developments have raised some doubt as to whether all paper issued by ag co-ops is, in fact, entirely exempt from the 1933 act or the blue sky laws. The whole area of paper issued by cooperatives has come under closer scrutiny during the past few years." The article goes on to examine the issue in detail, including what is involved in registering with the SEC and state securities commissions.
"You need to be mindful of blue sky laws," he says, adding that "this can be a hassle if you have investors in different states." Still, "at the seed [funding] level, you may not get much documentation." Adds Bryan Finkel, an investment manager with Advanta Bank Corp.
Some initial concerns regarding the posting of offering statements on Web sites and compliance with state blue sky laws was alleviated by the adoption of the National Securities Markets Improvements Act (NSMIA) of 1996, which effectively pre-empted many state requirements applicable to offerings of state and local government bonds.