What are Blue Sky Laws?
In order to protect investors dealing in securities from fraud, there are some Federal Securities laws at the country level. But, in addition to them, every state in the US enforces its own set of laws called Blue Sky Laws. Thus, Blue Sky Laws are state regulations and their purpose is to safeguard investors from securities fraud. And these being the laws promulgated by the states, there may be some variations in the rules and regulations state-wise for these blue sky laws. Moreover, this also suggests and implies that the issuer of securities needs to comply with the state laws as well for offering securities to the public.
Mandates of these Laws
Now, though Blue Sky Laws can vary by state (as every state has its own set of them), there is some commonality. They typically require the seller of new securities to register their offerings before selling them in the market. These laws also demand financial info of the deal from the seller/company. Licensing of brokers, brokerage firms, and investment advisors is also mandatory under these laws.
The company issuing the security must reveal the terms of the offering. Any other information which can affect the security also has to be disclosed. As a result of all these mandates, the investors get sufficient information and thus can make well-informed investment decisions.
Since Blue Sky Laws are state laws, the filing requirements of different states can vary. The issuer has to fulfill filing requirements for each of the states in which the entity wishes to issue securities. The state delegates also decide on the fairness of the deal for the investors. The intention is to prevent the sellers from taking advantage of innocent investors who may not be able to determine what’s fair for them.
The securities listed on National Stock Exchanges are exempt from Blue Sky Laws.
Here, it is important to understand that state regulations do not take precedence over Federal Securities Regulations. Further, blue sky laws do not empower states to regulate the national sale of any security. The Securities and Exchange Commission is the supreme body in regulating the federal securities laws together with national stock exchanges.
The Origin of Blue Sky Laws
The blue sky laws came up with the intent to safeguard and protect the interest of investors for ensuring that all the important information is disclosed to the public/investors at a fair and reasonable level, so as to assist them in taking a careful decision with regard to their investments. Further, to impose liability and penalties for false and misleading information. And to provide an administrative mechanism to regulate and enforce these laws.
History and Evolution of Blue Sky Laws
Blue sky laws took life in the early 1990s. Kansas is believed to have passed the inceptive blue sky law in 1911. Although the term came into existence when Kansas banking commissioner J. N. Dolley was pushing for the passing of the Kansas statue a year ago. He was declaring his intention to shield innocent investors from investing in ventures that have no foundation but feet of ‘blue sky’.
In those times, such unproven ventures were common. Companies used to make unsubstantiated claims about the prospects of the investment. These companies used to sell securities without producing any evidence to back their claims. There was hardly any administrative supervision of the market and the finance industry by any governing body. Hence, frauds were common and corporates used to hide unfavorable details from the investors. This inflated the market in the 1920s before its fateful crash in 1929, known as the 1929 stock market crash or the biggest depression.
Beginning in 1911, by 1931 almost all the states in the US had blue sky laws in place. Hence, these state laws go before two federal acts took life in the US governing the issue and sale of securities. The first one is the Federal Securities Act, 1933. And, a year after, the Securities Exchange Act, 1934 was passed. Both are Federal Acts and do not assume the place of blue sky laws.
Other Subsequent Laws
In 1956, Federal legislators came up with the Uniform Securities Act. The purpose of this law was to provide a template or guide to the states to build and flair their own laws. And most of the states by that time had built their blue sky laws from this act. However, there were still many differences between different states. Practices that were appropriate in one state were inappropriate in another state. Thereby one act that was considered fraud in one state, was considered ok in another state. The judicial pronouncements also varied from state to state. The result was a complex set of laws and decisions which made it difficult for companies to issue securities in multiple states. And so, an even more uniform law was the need for.
Hence, in pursuit of a more systematic and homogeneous regime, in 1996 the US Congress came with the National Securities Markets Improvement Act. This law increased the federal government’s powers in the securities market and cut down states’ control in setting standards and specifying filing requirements. This law also labels some securities as covered securities. Securities categorized as covered securities are exempt from state registration requirements. Other subsequent federal laws limit the state courts’ jurisdiction in case of financial fraud. Blue sky laws, still, are an important regulation for issuers of security to abide by.
Let’s Highlight the Merits of the Blue Sky Laws
- They bring all the necessary information about the company issuing the securities as well as the offer to the investors’ notice
- Check for the credibility of the company issuing the security and ensure that the issuer is not a fly by night operator
- They do a merit review of security offers to conclude if the offer is fair to the innocent investor
- Issue liability to the company not fulfilling the registration requirements.
- Provide an overall safe and healthy environment for securities dealing, and builds confidence among the investors
Major Limitations of the Laws
- For companies who want to issue securities in multiple states, these laws create a complex list of regulations and registration requirements to follow, which may become difficult to follow.
- A heavy burden of different regulatory requirements by different states falling on a single company may discourage them to grow their operations. Many corporates across the US feeling the same will translate into lower economic growth.
- The Federal laws cut many of the state powers which makes states less mighty.