“Blue Sky Laws” are state-level securities regulations designed to protect investors from fraud and ensure fair dealing in the sale of securities. The term comes from a vivid metaphor:
A Kansas judge in the early 1900s described fraudulent investment schemes as having “no more substance than so many feet of blue sky.”
This colorful phrase captured the essence of the problem: unscrupulous promoters selling worthless investments backed by nothing more than lofty promises.
Origin of the Term
The phrase gained traction after Kansas passed the first Blue Sky Law in 1911, requiring registration of securities offerings and licensing of brokers. The goal was to regulate speculative or deceptive investment offerings being sold to the public — especially in industries like mining, oil, and real estate.
Soon, other states followed suit, adopting their own versions of these investor protection statutes.
What Do Blue Sky Laws Do?
While the SEC governs federal securities regulation, Blue Sky Laws govern securities within each individual state and typically require:
- Registration or notice filings for securities being sold to residents of the state
- Licensing or registration of brokers, dealers, and investment advisers
- Anti-fraud provisions similar to federal laws
- Disclosure of material risks and information to investors
Why They Still Matter Today
Even if you’re relying on a federal exemption (like Regulation D), you must still comply with Blue Sky filing requirements in each state where you offer securities. This includes:
- Filing Form D notices
- Paying state fees
- Complying with any advertising or disclosure restrictions unique to the state
Bottom Line for Private Lenders
Even if you’ve structured your offering properly under federal law, state Blue Sky compliance is still required and enforced. Failure to comply can result in fines, enforcement actions, or even having to rescind securities offerings (i.e., return investor money).
