What Are Blue Sky Laws?
Let me explain blue sky laws to you directly: these are state regulations set up as safeguards for investors against securities fraud. They vary by state, but they generally require sellers of new issues to register their offerings and provide financial details about the deal and the entities involved. This gives you, as an investor, a lot of verifiable information to base your judgments and decisions on.
Key Takeaways
Here's what you need to know: blue sky laws are state-level, anti-fraud regulations that require issuers of securities to register and disclose details of their offerings. They create liability for issuers, so legal authorities and investors can take action if they don't comply. Most states follow the model Uniform Securities Act of 1956, and these laws are superseded by federal securities laws if there's duplication.
Understanding Blue Sky Laws
I want you to understand that blue sky laws add an extra layer of regulation on top of federal securities rules. They usually require licenses for brokerage firms, investment advisors, and individual brokers offering securities in their states. If you're running a private investment fund, you have to register not just in your home state but in every state where you do business.
As an issuer, you must reveal the terms of the offering, including any material information that could affect the security. Since these laws are state-based, each jurisdiction might have different filing requirements for registration. The process often includes a merit review by state agents who check if the offering is balanced and fair for the buyer.
While blue sky laws vary by state, they all aim to protect individuals from fraudulent or overly speculative investments. Their provisions create liability for fraudulent statements or failure to disclose information, so lawsuits and other legal actions can be brought against issuers.
The intent here is to deter sellers from taking advantage of inexperienced or unknowing investors and to ensure that offers for new issues have been vetted by state administrators for fairness and equitability. There are exceptions for certain types of offerings that don't need registration, like securities listed on national stock exchanges, as part of federal efforts to streamline oversight. Offerings under Rule 506 of Regulation D of the Securities Act of 1933 also qualify as 'covered securities' and are exempt.
History of Blue Sky Laws
The term 'blue sky law' originated in the early 1900s, when a Kansas Supreme Court justice talked about protecting investors from speculative ventures that had no more basis than 'so many feet of blue sky.'
Before the 1929 stock market crash, speculative ventures were everywhere. Companies issued stock, promoted real estate, and other deals with lofty, unsubstantiated promises of profits. There was no SEC, and little oversight in the investment industry. Securities were sold without evidence to back claims, and sometimes details were hidden fraudulently to attract investors. This contributed to the hyper-speculative 1920s environment that inflated the stock market before its collapse.
Blue sky laws existed back then—Kansas had the first in 1911—but they were weakly worded and enforced, and fraudsters could just move to another state. After the crash and the Great Depression, Congress passed Securities Acts to regulate the market federally and create the SEC.
In 1956, the Uniform Securities Act was passed as a model law to guide states in crafting their securities legislation. It forms the foundation for 40 out of 50 state laws today and is often called the Blue Sky Law itself. Later laws, like the National Securities Markets Improvement Act of 1996, preempt blue sky laws where they duplicate federal law.
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