Blue Sky Law Definition

Blue sky laws are state regulations that help protect investors against securities fraud. These laws vary by state. Blue sky laws can be confusing because people think only the federal government regulates securities transactions. Here’s what small business owners need to know about blue sky laws.

Blue Sky Law Definition

While the substance of a blue sky law varies from state to state, the meaning of blue sky law is the same nationwide. Blue sky laws are state securities laws designed to help protect investors and prevent fraud. These laws require securities issuers and dealers to register with state financial regulators. 

History of Blue Sky Laws

Limiting the Blue Sky

Understanding the history of blue sky laws is important to understand why they’re still in use today. Like many famous quotes, the term “blue sky law” is of indeterminate origin. Some say that it came into use when a Kansas State Supreme Court justice sought to protect investors from ventures that had “no more basis than so many feet of ‘blue sky.’” Others claim that it comes from wanting to protect investors from being sold “anything under the blue sky.” Either sounds fitting for protecting investors and rounding out the blue sky law definition.

Additionally, the definition of a blue sky law originates from a time before there was federal regulation of securities products. Companies could promote any product they wanted and make limitless promises of future returns. There was no national financial regulator and little state or federal oversight of the financial industry. Securities could be sold without any evidence that the underlying product even existed. In fact, these very conditions contributed to the speculation and frenzy that led to the stock market crash in 1929.

Blue Sky Laws and Federal Regulation

After the tragic stock market crash of 1929, Congress finally took a stand and began regulating securities markets. Before then, only states had done so. In the 1930s, Congress enacted several Securities Acts to regulate the stock market. Congress also established the Securities and Exchange Commission. 

In 1956, and later amended in 2002, a model law called the Uniform Securities Act was developed to help states create their own securities legislation. This is truly the blue sky law example, as it creates the foundation for the state securities laws of 40 out of 50 states. In fact, the Uniform Securities Act is often called The Blue Sky Law. 

Since the 1930s, Congress has passed other securities regulations to try to streamline the state and federal governing of securities markets. For instance, the Securities Markets Improvement Act of 1996 states that federal law governs if there is a conflict between state blue sky laws and federal securities laws.

Blue Sky Law: Summary

• Blue sky laws are state securities laws that typically require securities issuers and dealers to be registered and to make robust disclosures about their offerings.
• If state laws follow the model Uniform Securities Act of 1956 as amended in 2002 and they conflict with any federal securities law, federal securities law will govern. 

How We Can Help

If you’re contemplating growing your small business by offering your company’s securities for sale, we can help support you in that journey. If you’re looking to set up a corporation, we can help you set one up virtually anywhere in the U.S. Our Corporate Formation Service can help you form your entity quickly and easily. Running your business as a corporation can enable you to issue stock and potentially take part in an IPO. And once you’re up and running, we can help you with business entity compliance with our Worry-Free Compliance Service.