The State of Blue Sky Laws

By Thomas Abrahamson, Spring 2014 Student Intern

blue skySecurities regulation in the United States has several levels. First, regulations take place on a federal level through Congress and administrative agencies such as the Securities and Exchange Commission (SEC). Then after these federal regulations you have state legislatures and commissions. It is these state level regulations that are referred to as “blue sky” laws.

Blue sky laws developed out of the years leading up to the Great Depression. This was in response to many ordinary investors losing money in highly speculative or even fraudulent schemes promising high returns. The name blue sky laws came from the opinion in Hall vs. Geiger-Jones Co., when Justice McKenna used the phrase to characterize “speculative schemes which have no more basis than so many feet of blue sky.”

Each state has its own laws regulating securities activities within its own boundaries. The basic objectives of these laws are to ensure investors have all significant financial and non-financial information about a security being offered for sale, and to prohibit deceit, misrepresentations, and fraud in the sale of a security.

Blue sky laws provide for oversight of the sales process and create liability for fraudulent sales in two separate ways. First, states require the registration of securities that will be offered or sold within the state, unless the offerings fall within specified exemptions from registration. A state’s securities agency, such as the Securities Division of the Secretary of State’s Office in Georgia, administers the process of registering. The state’s securities administrator has the power to revoke a broker-dealer’s registration or a representative’s license if either one has violated the state’s laws. A list of state securities commissioners, and their addresses, is listed here.

The second way in which blue sky laws create liability is with antifraud provisions. These create liability for any fraudulent statements or failure to disclose information as required. These claims vary greatly depending on the state, but remedies for investors may include bringing private suits for rescission of the transaction, disgorgement of profits, or other damages.

To learn more about the blue sky laws or securities administrators in your state you may look to your state’s Security Commissioner’s website.