Blue Sky Law Explained

Have you heard of the Blue Sky law? When it comes to investing, we need laws and regulations that protect us as investors. You don’t want to lose money in fraud or an investment scheme. Luckily for us, there is a law that protects us and our accounts.

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Specific Requirements of Blue Sky Laws

In the US, Blue Sky law refers to the state-level regulations imposed on securities. These regulations serve a very important role. That is to protect investors from fraud and deceptive practices by those selling securities. These laws require companies and individuals involved in securities offerings to:

register with regulatory authorities,
disclose relevant information about the selling of securities
and comply with specific reporting and licensing requirements.

The term “blue sky law” originated because many securities issuers would sell building lots in the “blue sky” without actual value. In case you didn’t know, each state has its blue sky laws. And while they share common objectives, their specific provisions may vary.

The Two Levels of Security Regulation

In case you didn’t know, securities are regulated on two levels:

Federally: Through the Securities and Exchange Commission (SEC) and associated federal securities laws, most public securities offerings in the United States have to file a registration statement. The registration statement, typically filed on Form S-1, includes detailed information about the issuer, its business, financial statements, and the securities offered.
State Level: through blue sky laws implemented by each state. Keep in mind that every state is different, but the underlying principles are the same, state to state: Protect the investor.

Keep in mind that when selling anything that can be deemed a security, you have to make sure you’re in compliance with both federal regulations and the applicable state-level blue sky laws.

Blue sky laws require that any securities sold within a state be registered, as well as anyone selling them (think brokers/dealers and investment advisors). Finally, fines can be imposed on those making false promises regarding investment returns.

5 Minute Takeaway: Blue Sky Law

Blue-sky laws or State securities laws are the securities laws enacted by each state in the United States.
These laws vary from state to state and generally require registration or notice filings before offering or selling securities within a particular state.
There are two levels of regulation for securities: 1) federal regulation through the SEC and related federal securities laws, and 2) blue sky laws that each state enacts
When selling anything deemed a security, you must comply with federal regulations and the applicable blue sky laws.
Some states may give an exemption from the registration requirements. , such as exemptions for certain types of securities or transactions, limited offering exemptions, or exemptions for offerings to accredited investors

Specific Requirements of Blue Sky Laws

Blue Sky laws generally require the registration of securities offerings, sales, stockbrokers, and brokerage firms. They also oversee licensing and reporting requirements for broker-dealer firms, individual brokers, and financial advisors.

Blue Sky laws safeguard investors. They encourage transparency and fair market practices and require risk disclosure. When regulators enforce the laws, they can not only deter but also stop fraudulent activities and encourage investor confidence.

History of Blue Sky Laws

The term “blue sky law” was first used as a metaphor to symbolize the deceptive nature of some securities that these laws were made to prevent.

These laws were put in place by the government at the state level to shield the public from deceitful practices involved in the sale and offering of securities.

The roots of blue sky laws can be traced back to the early 1900s when worries about fraudulent securities offerings started to emerge.

The concept gained greater prominence when a justice of the Kansas Supreme Court highlighted the importance of protecting investors from speculative and deceitful securities.

By 1933, nearly all states, except Nevada, had enacted their blue sky laws.

The Uniform Securities Act (USA)

The Uniform Securities Act (USA) was created in 1956 to make laws more consistent and similar across states. The USA made it a model for states to use when making their blue sky laws. Although most states included parts of the Act, there were differences, so laws varied from state to state.

Once again, the Act aims to stop securities fraud at the state level. The Act has rules for securities registration, exemptions, licensing requirements for broker-dealers and investment advisers, enforcement actions, and measures to protect investors. It also helps the U.S. Securities and Exchange Commission (SEC) enforce and regulate securities.

Revisions of The Uniform Securities Act

Several revisions to the Uniform Securities Act have occurred over the years. The current version is the Uniform Securities Act of 2002, which replaced earlier 1956 and 1985 versions.

Each state has the freedom to adjust and adopt the provisions of the Act as it sees fit, leading to some differences in state laws. It’s important to note that the Act is a model for states to consider when creating securities laws rather than binding ones.

What Are Some Challenges of Blue Sky Laws?

Even though Blue Sky laws aim to protect investors from fraud, they’re not perfect. Let’s unwrap the challenges below:

Regulatory Gaps

Unfortunately, the markets are always changing, and it’s hard to stay ahead of all the different and changing instruments offered. In some cases, the regulations aimed at protecting investors are behind. We see outdated rules and gaps in legislation, putting investors at risk.

Inconsistency & Confusion

Securities regulations vary from state to state. Things can get confusing. It makes it hard for companies operating in multiple states to stay in compliance.

Unnecessary Red Tape

Take a first-time founder trying to navigate the early stages of raising capital. What if they want to raise money from non-accredited investors? Non-accredited investors make things super complicated.

You have to go through a whole process and a separate filing. The blanket advice online states that you can “only raise from accredited investors“. However, after digging into it more, it looks like you can raise to 35 non-accredited investors.

And don’t forget, you need to file Form D within 15 days. If you don’t properly file, the SEC can hit you hard with fines and shut you down, especially if an investor complains.

It’s harder for small businesses and startups to get money. Following the rules for registering and reporting can take a lot of time and money, especially for small companies with few resources. These requirements might stop people from investing and coming up with new ideas.

Questionable Efficacy

Despite regulations, the current blue sky laws don’t always work to detect and prevent fraud in the securities market.

Insufficient Enforcement

The laws aren’t enforced enough to deal with new types of fraud in the digital age. It requires effort to make sure securities rules are followed.

Similar Versions In Other Countries

This should not come as a surprise, but Blue sky laws are not exclusive to the US. We all know that fraud and deception in the securities market are not exclusive to the US.

Canada

In Canada, blue sky laws are securities regulations and vary by province and territory. Each jurisdiction has its own securities commission or regulator that enforces these laws. For example, Ontario has the Securities Act, which governs the offering and trading of securities in that province.

Australia

Australia’s version of the SEC is known as the Australian Securities and Investments Commission (ASIC). One role of ASIC is to enforce its version of blue sky laws. Australia’s securities offerings and trading are primarily governed by the Corporations Act 2001.

United Kingdom

The Financial Conduct Authority (FCA) oversees securities regulations in the UK. It is through the Financial Services and Markets Act 2000 (FSMA) that the FCA enforces and governs securities offerings and trading in the U.K.

European Union

The securities offerings and trading regulations have been standardized across the European Union member countries. Have you heard of the Markets in Financial Instruments Directive (MiFID II)? They are a crucial framework that sets out regulations for protecting investors and maintaining market integrity across the E.U.

Notably, although these countries have regulations akin to blue sky laws, the specific details and requirements may differ. Each jurisdiction has unique rules and regulatory authorities responsible for enforcing securities laws.

Exemptions to Blue Sky Laws

Did you know that each state has its own de minimis exemption to the blue sky notice filing? New York state requires you to file/register the exempt offering before it is sold in the state.

However, every other state permits filings within 15 days of the first sale. Additionally, certain types of securities or transactions, like a limited offering, can be exempted.

Exemptions are sometimes given for offerings given to accredited investors (basically someone meeting specific financial baseline requirements).

Finally, if a security offering is limited to a single state, it may qualify for exemptions under the intrastate offering exemption.

Final Thoughts: Blue Sky Law

Why do we have blue sky laws? Investors want to be protected. So, transparency is encouraged. You can see the risks disclosed ahead of time. These laws also regulate brokers. They have to be in compliance with licenses. If you can be protected from fraud and investment schemes, don’t you feel better?

Frequently Asked Questions

What Does “Blue Sky” Mean in Business?

In business and investing, people often use the term “blue sky” to discuss the positive potential for growth and success. It means a bright and promising future with many opportunities, much like a clear blue sky that suggests good weather and endless possibilities.

Why Is It Called Blue Sky Law Philippines?

In the Philippines, “Blue Sky Law” refers to the Securities Regulation Code (SRC) or Republic Act No. 8799. The SRC aims to protect investors and maintain fair, efficient, and transparent securities markets.

What Does “Blue Sky” Mean in Law?

State securities laws in the United States, also known as blue sky laws, aim to protect investors from securities fraud. They require companies to register their securities offerings and provide information to investors.

What Are the Blue Sky Laws in Canada?

Each territory has its own securities commission. These bodies regulate the securities industry, including rules for registration, information that companies need to share, and enforcement of securities laws. Securities legislation in Canada varies by province and territory, but it generally has similar objectives and principles.

Blue Sky Law Explained