Blue Sky Law
State-level securities laws that require the registration of securities offerings and broker-dealers within the state to protect investors from fraud.
What is Blue Sky Law?
Blue sky laws are state securities regulations that require securities offerings, broker-dealers, and investment advisers to register with the state securities regulator before conducting business within that state. The term originates from a Kansas judge's 1917 description of fraudulent speculative investments as 'having as much value as so many feet of blue sky.' All 50 U.S. states have blue sky laws, which complement — but operate independently from — the federal securities laws enforced by the SEC. Many securities offerings are preempted from state registration requirements under the National Securities Markets Improvement Act of 1996 (NSMIA), which exempts federally covered securities (exchange-listed securities, mutual funds) and large Regulation D private placements from blue sky registration. However, notice filings and fees are still typically required in each state even for exempt offerings. The SEC and NASAA (North American Securities Administrators Association) coordinate enforcement efforts with state regulators.
Example
A startup raising $5 million through a Regulation D Rule 506(b) private placement must comply with both federal SEC rules and state blue sky laws. While NSMIA exempts the offering from full state registration, each state where investors reside typically requires a Form D notice filing and a small fee within 15 days of the first sale. Failure to file can expose the company to state enforcement actions and potential rescission rights for investors.
Source: NASAA — State Securities Laws