State regulations set up to safeguard investors against potential securities fraud are called blue sky laws. These laws vary state by state but in general require any selling new security to register the offering within a reasonable period of time before the offering. Along with registration the entity making the offering must provide details of the entities involved and how the offering will work. The point of these laws is to give investors sound information on which to base their investment decisions and prevent securities fraud.
Do Blue Sky Laws Still Exist?
The answer is yes, they do. There are blue sky laws in all states as well as Federal regulation that typically supersede them. These laws have been around for more than a century in the first states that enacted them like Kansas and slightly less than a century for the vast majority of the lower 48 states. Although the wording from jurisdiction to jurisdiction varies, the thrust of blue sky laws from state to state is the same. Anyone wishing to promote securities needs to file with the state and explain the details of their offering.
Who Regulates Blue Sky Laws?
Blue sky laws are state laws. However, forty states have laws modeled after the US Uniform Securities Act of 1956. While the SEC regulates and enforces these laws states also have regulators who enforce their specific law. Because the laws have to do with everything from licenses for investment advisors, brokers, and brokerage firms to specific public offerings, the specific state entity involved in regulation will vary. In general, Federal law supersedes state law when the laws cover the same thing.
Do All States Have Blue Sky Laws?
After the state of Kansas enacted the first blue sky law in 1911, they were followed by 46 of the other 47 states by 1933. Nevada was the only hold out. Today every state has blue sky laws. Forty states have blue sky laws that follow the Federal Uniform Securities Act of 1956. Although these states have modeled their law after the Federal law that does mean that they copied it. As such, anyone planning to register new securities in various states will need to consult that state’s law.
Do Blue Sky Laws Apply to LLCs?
If you are forming a limited liability company and looking for investors, you will need to comply with Federal law and with blue sky laws in each and every state where you expect to find investors and/or do business. The term blue sky goes back to a judge who ruled on a case involving a stock which he said had the same value as a patch of blue sky. As with other aspects of blue sky laws, the rules that apply to LLCs can vary from state to state as will filing fees and dates for filing. All of this will require research.
Do Blue Sky Laws Apply to Secondary Markets?
When securities trade on the Nasdaq or NYSE “secondary markets” they are exempt form state blue sky laws. However, state blue sky laws do apply for resale of securities in so-called Regulation A offerings. These laws vary from state to state but will have an effect on liquidity of securities in the secondary market. Companies raising capital will need to be aware of which laws apply in which states and deal with the issue accordingly.
Do Foreign Companies Need to Comply With Blue Sky Laws?
Blue sky laws apply to any company that wants to do business in a state and for whom blue sky laws apply. The location of the main office of the business entity wishing to offer securities, investment advice, etc. is not the issue. The issue for blue sky laws to apply is where they are doing business. Thus a foreign company operating in any of the US states will need to comply with both Federal securities laws and state blue sky laws.
Do Startups Need to Get Blue Sky Law Permits?
Startups need to abide by state blue sky laws if they do business in a state or plan to do so and their business falls into the blue sky law realm. This will include raising money, giving investment advice, acting as a broker, selling securities and anything else specified in a specific state’s blue sky laws. These laws apply to new companies (startups) and to existing companies who want to expand their operations into states where they have not previously had a business presence.