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What Are Blue Sky Laws?

Protecting the consumer from securities fraud is a key focus of the Securities and Exchange Commission on the federal level. There are agencies and numerous federal laws in place to help ensure the public is protected. Besides federal laws, there are also many state laws at work to guard consumers from securities fraud. These laws—also known as blue sky laws—play a key role in protecting the public.

But what are they exactly? And how do they work?

Each state has its own unique set of blue sky laws that regulate securities transactions. These laws also prevent fraudulent practices in the sale of securities. The law’s unique name is believed to have been coined in the early 20th century when a Kansas Supreme Court justice was speaking about protecting investors from “speculative schemes which have no more basis than so many feet of ‘blue sky.’” Federal law preempts most state law; however, where federal law is silent, these blue sky laws fill in the gaps to protect the public.

A blue sky law pressures issuers of securities. An issuer of securities includes anyone who issues stocks, options, or debt. These laws will look different depending on the state. New York’s laws for securities will be different from Pennsylvania’s. In fact, in New York, there is even an exemption from these laws focused on investing in theatrical productions.

If you are an issuer of securities, know the blue sky laws of the state you are operating in and the blue sky laws of the state into which you are selling or issuing securities.

Failing to comply with a blue sky law can have serious consequences, so it may be wise to consult with an experienced securities attorney in your state if you are planning to issue securities.

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