What are the 'Blue Sky Laws'

Blue Sky Laws are state regulations established as safeguards for investors against securities fraud. The laws, which may vary by state, typically require sellers of new issues to register their offerings and provide financial details. This allows investors to base their judgments on verifiable information.

BREAKING DOWN 'Blue Sky Laws'

These laws, which serve as an additional regulatory layer to federal securities rules, usually include requiring licenses for brokerage firms, investment advisors, and individual brokers. This also calls for private investment funds to register in not only their home state, but every state where they wish to do business offering securities. The additional scrutiny of offerings can require close attention to understanding the requirements of each state's respective laws.

The intent of such laws is to ensure that investors are presented with offers for new issues that have already been vetted by their state administrators for fairness and equitability. This is an effort to deter sellers from taking advantage of investors who lack experience or knowledge about the security. Issuers of offerings must supply terms of the offering when they register, which includes disclosures of material information that may affect the security. The state-based nature of these laws means each jurisdiction can include different filing requirements for registering offerings. The process usually includes a merit review by the state agents who determine whether the offering is balanced and fair for the buyer.

There are exceptions under these state laws regarding to the types offerings that must be registered. Offerings that fall under Rule 506 of Regulation D, for example, qualify as “covered securities” of the Securities Act and are exempt. These exemptions include securities listed on national stock exchanges, part of an effort by federal regulators to streamline the oversight process where possible.

History Behind the Blue Sky Laws

The term is said to have originated in the early 1900s, when a Supreme Court justice declared his desire to protect investors from speculative ventures that had "as much value as a patch of blue sky." In the years leading up to the 1929 stock market crash, there were instances of companies making lofty, unsubstantiated promises of greater profits to come.

Based primally on such promotional language, securities were sold without corroborating material evidence to support these claims, or in some cases details were fraudulently hidden to attract more investors. Such activities contributed to the hyper speculation of the time that inflated the market before its inevitable collapse. Regulatory measures, including Blue Sky Laws, became part of the investing landscape as a result.

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