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What Are Blue Sky Laws?
Blue sky laws are state regulations established as safeguards for investors against securities fraud. These laws, varying by state, usually require sellers to register new issues and disclose financial information about the deal and entities. This provides investors with reliable information to help them make informed decisions.
Key Takeaways
- Blue sky laws are state regulations designed to protect investors from securities fraud by requiring registration and disclosure of offerings.
- These laws impose liability on issuers for fraudulent activities, allowing legal actions by authorities and investors.
- Blue sky laws typically follow the Uniform Securities Act of 1956 but may differ across states due to specific filing requirements.
- Exemptions to these laws exist for certain securities, like those listed on national exchanges or covered under specific federal regulations.
- Originating in the 1900s, blue sky laws gained importance post-1929 crash, highlighting the need for investor protection and market integrity.
In-Depth Look at Blue Sky Laws
Blue sky laws—which serve as an additional regulatory layer to federal securities regulations—usually mandate licenses for brokerage firms, investment advisors, and individual brokers offering securities in their states. These laws require private investment funds to register in their home state and all other states where they operate.
Security issuers must disclose offering terms, including key information that might impact the security. The state-based nature of these laws means each jurisdiction can include different filing requirements for registering offerings. State agents often review offerings to ensure they are fair and balanced for buyers.
Important
Although blue sky laws differ by state, they all aim to protect people from fraud and risky investments.
The laws’ provisions also create liability for any fraudulent statements or failure to disclose information, allowing lawsuits and other legal actions to be brought against issuers.
These laws aim to stop sellers from exploiting inexperienced investors and ensure offers are vetted for fairness by state administrators.
There are certain exceptions regarding the types of offerings that must be registered. These exemptions include securities listed on national stock exchanges (part of an effort by federal regulators to streamline the oversight process where possible). Offerings that fall under Rule 506 of Regulation D of the Securities Act of 1933, for example, qualify as “covered securities” and are also exempt.
Evolution and History of Blue Sky Laws
The term “blue sky law” is said to have originated in the early 1900s, gaining widespread use when a Kansas Supreme Court justice declared his desire to protect investors from speculative ventures that had “no more basis than so many feet of ‘blue sky.'”
In the years leading up to the 1929 stock market crash, such speculative ventures were rife. Many companies issued stock, promoted real estate, and other investment deals while making lofty, unsubstantiated promises of greater profits to come. There was no Securities and Exchange Commission (SEC), and little regulatory oversight of the investment and financial industry. Securities were sold without corroborating material evidence to support these claims. In some cases, details were fraudulently hidden to attract more investors. Such activities contributed to the hyper-speculative environment of the 1920s that led to inflation of the stock market before its inevitable collapse.
Although blue sky laws did exist during that time period—Kansas enacted the earliest one, in 1911—they tended to be weakly worded and enforced, and the unscrupulous could easily avoid them by doing business in another state. Following the stock market crash and Great Depression, Congress enacted Securities Acts to regulate the market federally and create the SEC.
In 1956 the Uniform Securities Act was passed, a model law providing a framework that guides states in the crafting of their own securities legislation. It forms the foundation for 40 out of 50 state laws today, and itself is often nicknamed the Blue Sky Law. Subsequent legislation, such as the National Securities Markets Improvement Act of 1996, pre-empts blue sky laws where they duplicate federal law.
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