Blue-Sky Laws

Blue-sky laws are state securities laws enacted by each state to regulate securities offerings within that state. The name supposedly comes from the phrase “as much value as a patch of blue sky,” referring to worthless securities. They predate the federal Securities Act of 1933 and require companies to register securities offerings with state regulators and disclose information to prevent fraud. While the federal government is the primary regulator of securities, blue-sky laws remain a patchwork of state-level requirements.

Origins and the preemption story

Blue-sky laws were the first securities regulations in the United States, enacted by states starting in the early 1900s to protect citizens from worthless securities and fraud. When the federal government enacted the Securities Act of 1933, a question arose: did the federal law preempt state blue-sky laws?

The answer was nuanced. Section 28 of the Securities Act provided that nothing in the Act would “affect the validity of any contract or the legality of any action or failure to act, based upon the ground that such contract, action or failure to act violates any provision of the laws of any State.”

In plain English: federal securities law does not preempt state law. A company must comply with both federal and state requirements.

Registration and qualification

Under blue-sky laws, a company typically must register or “qualify” its securities offering with the state securities administrator. The registration is somewhat similar to SEC registration (Form S-1 or similar) but state-specific. Some states have rigorous disclosure requirements; others are lenient.

A company offering securities in multiple states must register in each state (unless it qualifies for an exemption). This created a compliance nightmare — a national offering required 50 separate filings.

The NSMIA and preemption of federal-covered securities

The National Securities Markets Improvement Act (NSMIA) of 1996 partially preempted blue-sky laws. Certain “covered securities” (securities listed on major exchanges, securities issued by investment companies, certain other categories) are exempt from state registration. This eliminated the requirement for major companies to register in each state.

However, blue-sky laws still apply to antifraud provisions (states can still prosecute securities fraud), and small offerings remain subject to state registration.

Exemptions and burdens for small offerings

Companies using Regulation A or Regulation D still must comply with blue-sky laws in many states. However, the JOBS Act preempted blue-sky laws for Regulation A+ offerings (the expanded Tier 2), allowing companies to raise up to $75 million without individual state approval.

Regulation D private offerings remain subject to state blue-sky laws, though many states have adopted a “NASAA” template (from the North American Securities Administrators Association) that streamlines compliance.

The patchwork: state variations

Blue-sky laws vary significantly by state. Some states (like California and New York) are rigorous and expensive to comply with. Others are more lenient. This creates a patchwork where a company might qualify easily in one state but face extensive diligence requirements in another.

A company planning a national offering typically works with counsel in each state or uses a coordinated filing process (like the NASAA’s coordinated review process) to manage the burden.

Antifraud provisions and enforcement

Even if an offering is exempt from state registration, the antifraud provisions of blue-sky laws still apply. A company cannot commit fraud in selling securities within a state, even if it is not registered. State attorneys general actively prosecute securities fraud and can sue for rescission (forcing the company to buy back securities) or damages.

Coordination with federal law

Blue-sky law enforcement is typically coordinated with federal enforcement. A state securities regulator investigating fraud might refer the case to the SEC or DOJ if it appears to be a larger scheme. The NASAA (North American Securities Administrators Association) facilitates coordination.

Modern friction: online and international offerings

Modern issues challenge blue-sky laws. When a company offers securities online via a crowdfunding platform, which state’s blue-sky laws apply? Generally, the state where the investor is located. A crowdfunding platform operating nationally must navigate fifty different state requirements.

Similarly, foreign issuers selling into the US must comply with blue-sky laws in each state, adding complexity to international offerings.

See also