Blue Sky Laws: What Are They?

Have you come across the term "blue sky laws" and wondered what it means? Don't worry, you aren't alone. The phrase "blue sky laws" comes from the words of Kansas Supreme Court Justice J. N. Dolley, in 1910, who wanted to protect investors from speculative ventures without more basis than "so many feet of blue sky."

There are fifty other securities regulators outside the SEC-all fifty states, with authority usually resting in a person known as the State Securities Commissioner. Below, you will find more facts about blue sky laws including what is required, definition of a merit review, and more.

Facts About Blue Sky Laws

• Every state has its own securities act, covering at least disclosure and merit review. Disclosure laws generally require companies to fully and fairly disclose all material facts relating to an offering. Merit review laws regulate disclosure and the substantive merits and fairness of the securities offering to investors. Some states perform merit reviews independently to determine fairness.
• If a company fails to pass a state's merit review, the company can not initially offer or sell its securities in that state. However, the company may still make institutional sales to investment companies and banks in that state.
• Merit review laws spring from the Uniform Securities Act of 1956, which almost forty states have adopted. Of these states, Arizona, Arkansas, California, Iowa, Massachusetts, Missouri, Nebraska, North Carolina, Ohio, Oklahoma, Tennessee, Texas, and Wisconsin apply the standards most strictly.
• Most problems complying with blue sky laws in all fifty states occur with regard to low capital, negative worth, lack of earnings, too many outstanding warrants and options, unreasonable offering price, cheap stock, dilution, loans to company officials or employees, unequal voting rights, and overly high offering expenses.
• Many states have adopted the federal securities laws and rely upon the SEC to enforce them. However, although the statutes and regulations may be identical in many states, state interpretations may differ.
• Though all fifty states also have broker-dealer and agent (stock broker) registration laws that vary widely, many states have stopped using their own forms and permit the registration filings to be made through the National Association of Securities Dealer's Central Registry Depository system (CRD), and use the NASD's examinations.
• Some securities transactions are exempted from registration because of their limited size or the special relationship between the issuer and the investors. However, varied state exemption regulations can still partially frustrate the purpose of exemption--reducing the costs of regulatory compliance for capital formation.

Next Steps

If you have more questions about your state's blue sky laws, let a legal professional help you. An experienced business and commercial law attorney will be able to answer your important questions about securities laws, the SEC, and more.

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