To regulate the financial markets and protect investors from fraud, the U.S. Securities and Exchange Commission (SEC) enforces federal securities laws. However, each state also has its own securities regulations, known as “blue sky laws.”
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What are blue sky laws?
Blue sky laws regulate the sale of securities such as stocks, bonds, and other publicly traded financial instruments. To protect investors from fraudulent sales, blue sky laws require security issuers (typically a public company or registered investment advisor) to fulfill specific disclosure and registration requirements. The issuer is also held liable for any incorrect or missing information it gives to investors.
Blue sky laws do not supersede federal securities statutes enforced by the SEC. Rather, they are an additional safeguard to protect public purchasers from securities fraud, bad-faith actors, illegal behavior, and other types of fraudulent exploitation.
Blue sky law regulation
Blue sky laws govern the offering and sales of securities within a state. Federal securities laws preempt blue sky laws in many cases. For example, Rules 506(b) and 506(c) of SEC Regulation D provide issuers safe harbor from state blue sky laws. However, state anti-fraud laws and notice filing requirements may still apply, depending on the type of offering and where investors are located.
Who regulates blue sky laws?
The Uniform Securities Act of 1956 set the framework for blue sky laws. Each individual state has its own regulatory agency—typically the Securities Commissioner—that enforces its blue sky laws. Contact your state securities regulator through the North American Securities Administrators Association (NASAA) website.
What do blue sky laws regulate?
Typically, blue sky laws provide a set of statutes—which vary by state—requiring offerings of securities to be registered. The laws apply to issuers as well as brokerage firms, individual brokers, and investment advisers. Private companies and venture capital fund managers must also be familiar with blue sky laws in order to properly file a “blue sky notice” or Form D within their operating state to avoid penalties and take advantage of exemptions from registration.
Blue sky notice: Regulation D & Form D
For VCs, PE firms, and other private investors, most private capital is raised under the framework outlined in Rule 506 of Regulation D, either through Rule 506(b) or Rule 506(c). VC fund managers who wish to avoid blue sky law registration requirements can file Form D with the SEC, citing Rule 506. These filings must be made within 15 days of the securities being issued and require minimal legwork for a VC firm’s legal team.
The issuer must then make notice filings in each state where the purchasers of their securities reside. Notice filing the Form D in each state allows state securities regulators to review your offering, verify compliance, and protect investors from potential fraud. The blue sky notice will include some of the following information about your company or firm:
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The securities being offered
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The terms of the offering
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Additional state-specific information
What happens if you violate blue sky laws?
If your brokerage or VC firm violates blue sky laws, a state securities commissioner can suspend the securities offering or, in more severe cases of impropriety, they may revoke your brokerage or VC firm’s ability to operate in the state.
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