If you’re offering a security for sale to the public, you have to comply with blue sky laws. But these laws are complex and differ from state to state. They can be confusing.
So here are the essential things you need to know about them.
What are blue sky laws?
Blue sky laws are state laws that require securities to be registered before they can be sold. They also require broker-dealers and their representatives to be registered before they can sell securities within the state.
The first of these laws was passed in Kansas in the early 20th century.
At that time, many Kansas legislators feared that the public was being taken advantage of by con artists who sold stocks that had no real companies behind them. So the legislature passed a law requiring companies to register their securities and explain what they do.
Within a few years, nearly all states had joined Kansas in passing similar laws.
Why are they called blue sky laws?
In 1917, Geiger-Jones Company sued the state of Ohio in federal court. It claimed that securities registration laws were unconstitutional because they restricted the flow of business between states.
In the response from the court, the judge upheld the laws and stated that some securities offer nothing but “speculative schemes which have no more basis than so many feet of ‘blue sky’”.
The phrase stuck. And ever since then, any state law that requires a company to register securities has been called a “blue sky law”.
Blue sky filings: What information is required?
Most of these laws are modeled after a federal law called The National Securities Act of 1933. This law requires any non-exempt security that is sold across state lines to have a prospectus that includes the following:
- Name of the company that issues the security
- State or country the company is organized in
- Address of the company headquarters
- Financial information such as the balance sheet, income statement, and a statement of how many shares are authorized or outstanding.
- Names and addresses of the following people:
- Anyone who owns more than 10% of the stock
- The guarantors of the company
- The CEO, CFO and CAO.
This package of information is called a “blue sky filing”. Although not all state laws require exactly the same information, they are all very similar.
The basic idea of these laws is to make sure that any security sold in the state is from a real company and that the public has enough info to make a reasonable judgment about whether it is worth buying.
In addition to the company that issues the security, any dealer or broker that sells the security must also make a blue-sky filing.
Luckily, most states have turned over the filing procedure to the Central Registory Depository System or “CRD”. This is a database maintained by the National Association of Securities Dealers.
This means that a broker or dealer no longer has to make duplicate filings in those states that allow him or her to use the CRD. However, a broker or dealer must still make separate filings in the states that do not allow this.
Blue sky laws can be very complicated and confusing. If you need more information about blue sky laws or to get assistance with your blue sky filings, please contact us at Blue Sky Filings by calling (844)723-4537 or by filling out our online form.