Understanding Blue Sky Laws: A State-Level Guide to Securities Regulation

Blue Sky Laws are a type of law that is administered on a state level in order to prevent securities fraud. While the SEC is in charge of taking care of securities fraud issues on a national level, states also try to take care of the problem by themselves. Each state has different laws when it comes to dealing with these issues. Here are the basics of Blue Sky Laws and how they work.

Blue Sky Laws

The term Blue Sky Laws was first coined by Justice McKenna of the Supreme Court. In dealing with a case that had to do with the level of constitutionality of state securities laws, he basically said that states should be able to make laws that help prevent their residence from getting involved in buying into "speculative schemes which have no more basis than so many feet of blue sky." It was here that the term Blue Sky Laws was originated and these laws have been referred as such ever since that point.

State Requirements

Every state has different requirements when it comes to offering securities for sale. If a company is planning on offering some type of security for sale in a state, it will most likely have to register with the state Securities Commission. Each state has a different agency that is in charge of enforcing these laws. In addition to registering securities, brokers and dealers also have to register with their respective states. By doing this, the hope is that investors will be able to avoid dealing with scams. If someone who is selling securities is not registered with your state, there is a good chance that you are dealing with a scam artist. Therefore, you should be easy for you to ask the person if they are registered with your state before going any further with them.

Uniform Securities Act

The Uniform Securities Act is a piece of legislation that was enacted in 1956. Even though this is a law that was enacted on a national level, most of the states modeled their own blue sky laws after this act. This makes the laws of approximately 40 states very similar. 

Exceptions

Even though Blue Sky Laws protect state residents from a number of different types of fraud, there are some types of securities that are exempt from most of these rules. For example, if a private offering is being used, it may not have to register with the state. Typically, this is only for securities that are being offered to the general public.

In addition to that, there are also exceptions for covered securities. Covered securities cover a wide range of investments such as securities that are listed on the New York Stock Exchange or the NASDAQ. Mutual fund shares are also exempt from these rules as they have to abide by strict SEC regulation in order to do business. Commercial paper and government securities are also exempt from these rules.