BLUE SKY LAW
A popular name for state statutes providing for the regulation and supervision of SECURITIES offerings and sales, to protect citizen-investors from investing in fraudulent companies. Most blue sky laws require the registration of new issues of securities with a state agency that reviews sell-ing documents for accuracy and completeness.
Blue sky laws also often regulate securities brokers and salespeople.
Almost all states have adopted blue sky laws,
regulating the sale of securities—investments in
bonds, mutual funds, limited partnerships, and
so forth. These laws acquired their name as early
as 1917, when the Supreme Court issued a deci-
sion on “speculative schemes which have no
more basis than so many feet of ‘blue sky’ (Hall
v. Geiger-Jones Co., 242 U.S. 539, 37 S. Ct. 217,
61 L. Ed. 480).
Blue sky laws place requirements on corpo-
rations and securities dealerships that offer
investments for sale to the public in a particu-
lar state. These laws are in many cases adopted
from the Uniform Securities Act, and are usu-
ally enforced primarily by the state’s attorney
general’s office. The federal SECURITIES AND
EXCHANGE COMMISSION (SEC) enforces federal
laws that concern foreign and interstate trans-
actions.
State blue sky laws require corporations to register securities before selling them so that regulators can check their marketing information
for accuracy. National on-line computer
networks that became widely available in the
mid-1990s posed new problems for states trying
to enforce these requirements. Texas, Ohio, and
New Jersey were among states that by 1995 had
begun prosecuting some of the thousands of
dealers who were offering unregistered investment
opportunities to small investors on computer
bulletin boards.
State laws usually require corporations to file
financial information, and can deny corporations
the privilege of doing business if their profile
or history is risky. State investigators can
determine whether a corporation’s financial
structure allows it to sell certain securities.
The laws also spell out the qualifications of
brokers, dealers, salespeople, investment advisers,
and others who work in the securities business.
They require dealers to identify the type
of investments they are planning to sell and
where.
Among the activities blue sky laws seek to
prevent are hard-sell tactics. Telephone “stockpeddling”
techniques that are high-pressure and
misleading can result in the suspension of a broker’s
license. A 1992 survey by Louis Harris and
Associates indicated that more than one-third of
all U.S. citizens had received a phone call about
investing, and five percent had made a purchase.
Many states now require that brokerages and
corporations selling on the public market also
provide a printed prospectus that describes the
risks of investing.
What happens when blue sky laws do not
work? States often provide an avenue for victims
of illegally sold securities to try to recover their
money, sometimes in addition to criminal prosecution.
Investors can charge MISREPRESENTATION
or lack of suitability and can demand
restitution from the BROKER in ARBITRATION.
CLASS ACTION suits can also be filed against a
fraudulent brokerage or corporation.
FURTHER READINGS
CCH Editorial Staff. 1999. Blue Sky Law Desk Reference.
Chicago, Ill.: CCH Inc.
Maynard, Therese H. 1997. “The Future of California’s Blue
Sky Law.” Loyola of Los Angeles Law Review 30 (June):
1573–98.
Shade, Joseph. 1997. “Financing Exploration: Requirements
of Federal and State Securities Laws.” Natural Resources
Journal 37 (summer): 749–83.
Slobodzian, Joseph A. 1999. Third Circuit Upholds Blue Sky
Law.” The National Law Journal 20 (February 1): B4.
CROSS-REFERENCES
Securities; Stock.
