Between 1911 and 1933, 47 of the 48 states developed their own Securities laws, which, like the federal Securities law that followed, are designed to protect Investors from fraudulent sales practices and activities. They all seek to prevent Issuers or agents from promising unrealistic returns and misinforming Investors about the investment risks.
Despite minor differences from state to state, most states require that:
- Securities offerings be registered if they will be sold in the state (unless a specific state exemption is available, which, in some instances, may include “Reg D” as long as those offerings comply with federal laws);
- Brokerage firms, their Brokers, Investment Adviser representatives and Issuers selling their own Securities be registered with and licensed by any state in which they operate or sell Securities; and
- Issuers or their agents disclose relevant information that will help Investors make informed decisions. They have anti-fraud provisions that create liability for any fraudulent statements or failure to disclose information as required.
Each state has its own state Securities agency commission to enforce these laws. They are allowed to review each offering and ensure that the individuals involved are qualified and regulated by the state. Most protect private Investors who have been injured by Securities fraud. Investors may be protected by rescission of the transactions, by forcing the seller to give up profits, or by other measures of damages.
Uniform Securities Act of 1956
Unfortunately, there are overlaps and discrepancies between many Blue Sky laws and the federal legislation enacted in the ‘30’s, particularly regarding liability and registration. Consequently, Congress enacted the Uniform Securities Act of 1956 that required that a Securities dealer cannot market an offering unless it complies both with federal and state laws.
It ensured, among other provisions, that the business behind the offering must not be bankrupt, a Blind Pool or a Shell Company. The price must be reasonably aligned with its current market price, and the company must have a minimum amount of assets.
1996 National Securities Markets Improvement Act (“NSMIA”)
Certain Securities offerings are exempt from SEC registration under Regulation D. In turn, the NSMIA provides for the preemption of the Blue Sky laws, so long as the private offerings comply with the applicable federal laws.
While compliant privately offered securities are preempted from Blue Sky registration, Issuers that sell securities in some states must still file Form D and pay filing fees to the state. This is known as “Notice Filing.”
History of the Term “Blue Sky”
“Speculative schemes which have no more basis than so many feet of ‘blue sky.’”
The first use of the name can be found in an opinion of Justice McKenna of the United States Supreme Court in 1917. Justice McKenna wrote the Court’s opinion in Hall vs. Geiger-Jones Co., 242 U.S. 539 (1917), which dealt with the constitutionality of state Securities regulations. Justice McKenna wrote:
… The name that is given to the law … is aimed …[at] “speculative schemes which have no more basis than so many feet of ‘blue sky’;” or, as stated by counsel in another case, “to stop the sale of stock in fly-by-night concerns, visionary oil wells, distant gold mines and other like fraudulent exploitations.”