What are blue sky laws and why are they important?

by | Friday January 19, 2024
What are blue sky laws and why are they important?

When it comes to investments, people like a clear sky rather than clouds of uncertainty. That’s where the Blue Sky Laws come in – a set of state regulations and rules to maintain a clear and safe financial atmosphere. From registration requirements to anti-fraud measures, these laws have a big impact on investor protection.

Keep reading and learn all the details.

Table of Contents


What are blue sky laws?

Basically, Blue Sky Laws are state regulations made to safeguard investors from fraudulent securities activities. This legislation controls the sale of securities, such as stocks and bonds, within a specific state. Overall, it refers to a key instrument for ensuring transparency and protecting investors in the market.

Originating in the aftermath of the Great Depression, “blue sky laws” were made possible by the Uniform Securities Act of 1956. Leading up to the stock market crash of 1929, the SEC did not exist to regulate offerings and many investment deals offered great profits to increase their sale.

Today, this legislation plays a central role in regulating offerings and safeguarding investors against fraud. For companies offering securities to investors, understanding the role they play will be key to a successful offering. 

The purpose of the Uniform Securities Act was to provide individual states the ability to implement their own securities laws. As some securities may not be covered at the federal level, giving states the power to enact blue sky laws to protect investors .

Today, 40 out of the 50 states have implemented blue sky laws based on the Uniform Securities Act.

Ensuring investor protection

The blue sky laws also create provisions for liability and may allow investors to bring lawsuits against issuers in the event of fraud.

Since the blue sky laws were established to protect investors, the laws enacted by each affect the registration of securities, registration of issuer and brokers, as well as the state’s ability to regulate and enforce restrictions.

Companies must register securities in both their home state and any other state in which it intends to do business. However, laws can vary between states; while the language they use can be similar, the interpretations may vary.

For issuers, this is an important fact to note, as they must meet each state’s requirement for each state they intend to sell securities in. 

Blue sky laws vs. regulations

In 1996, Congress passed the National Securities Market Improvement Act which exempts certain securities from state regulation and returns the regulation of broker-dealer registration to federal control. As a reaction to transactions being more difficult for companies because of the requirement to comply with blue sky laws, the Act reduced the power of individual states to regulate securities. 

While the federal government plays a major role in securities regulation, understanding the laws in each state which a company intends to sell securities is still essential.

For companies looking to raise money through Reg A+, Tier I offerings must be reviewed and registered with both the SEC and state governments.

Tier II offerings do not need to be reviewed by the state for them to be sold. In both cases, states retain the ability to investigate and charge issuers with fraud, so maintaining compliance will promote not only investor protection but will protect the company too.

Additionally, issuers and brokers must still adhere to notice and filing requirements set for each state. 

Your Shield Against Investment Fraud

With an understanding of blue sky laws, companies can plan for a successful offering by following regulations set in place by each state. Failure to comply with the laws can result in severe consequences and penalties.

While it may seem like an overwhelming task, state securities regulators can be contacted to ensure that your offering meets their requirements or better yet reach out to your securities lawyer who will guide you through depending on what regulation your company wants to use for its offering such as RegCF or RegD or RegA+, each one will have different provisions that you will need to follow to make sure you are compliant with your offering.

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