Although it is important to know about the federal laws that govern the issuance of securities, it is equally important to recognize the state laws regulating the securities that you are offering as well, especially those that fall under the category of blue sky laws. Blue sky laws are state level anti-fraud statutes designed to ensure that the public has accurate information about the investment. The also protect investors from fraudulent or overly speculative offerings.
Although individual states’ authority to legislate securities offerings that are offered on a national basis are now significantly restricted, blue sky laws are important to understand and require compliance for any size offering. Priori is committed to connecting you with an experienced securities lawyer who can ensure your compliance with state and federal laws.
The Origin and Purpose of Blue Sky Laws
The term “blue sky laws” is often attributed to an opinion of Justice McKenna of the United States Supreme Court written in 1917 where he upheld state laws intended to protect investors from “speculative schemes which have no more basis than so many feet of ‘blue sky’.” In reality, the term probably has been in use much longer, but nowadays, blue sky laws comprise state level securities laws aimed at protecting the consumer from fraud.
Although blue sky laws vary greatly from state-to-state, their purpose is always to protect investors from fraud through disclosure requirements, registration and licensing of those selling and offering securities, and the creation of liability for fraudulent offerings.
What Blue Sky Laws Regulate
In order to protect against fraudulent securities, states are empowered to regulate the sale of securities within their borders. Generally, blue sky laws now regulate two main things: the state registration requirements and anti-fraud prosecutions.
Blue sky laws create the registration and licensing requirements for anyone working with securities within the state. Most states require companies making offerings of securities to register with the state securities agency or commission before they can be sold. This generally requires a series of disclosures. In addition, these laws license brokerage firms, brokers and investment advisor representatives.
Penalties for Fraud
Blue sky laws also contain anti-fraud provisions that allow state regulators to conduct fraud investigations and prosecutions. They similarly create civil liability for companies that make fraudulent statements or fail to make appropriate disclosures.
Blue Sky Laws, NSMIA, and The Securities Act of 1933
As securities are increasingly offered nationally rather than at the state level, most regulation is no longer done at the state level. The National Securities Markets Improvement Act of 1996 (NSMIA) amended the Securities Act of 1933 to preempt the registration requirements of blue sky laws in favor of federal regulations in cases where the securities are national in character. Despite this, blue sky laws are in no way irrelevant, no matter how wide your offerings. The states still preserve the right to conduct anti-fraud enforcement actions and you may still need to register certain classes of securities at the state level. It is best to consult a securities lawyer about individual offerings in order to determine to what extent blue sky laws may apply to your company.
Depending on your situation, the cost of registration and licensing requirements of blue sky laws can vary. Hourly rates for Priori securities lawyers start around $225 per hour and range up to $450 per hour. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
If my company is selling securities in multiple states, how do I ensure that I am complying with the blue sky laws of each state?
If you are operating nationally, the NSMIA should preempt most state blue sky laws. However, the best way to ensure individual state compliance is to get legal advice from an experienced securities lawyer.
Do I need to hire legal counsel from each state I am going to sell securities in to ensure that I’m complying with blue sky laws?
It is important to know local blue sky laws that will apply to your securities offerings, so it is prudent to get a legal opinion from someone familiar with the state laws where you will be operating. If you are offering a multi-state, but not national security, it can be helpful to get input from a pool of attorneys with different kinds of expertise.