When it comes to investing in securities, whether it's stock in a company or ownership in an LLC, it's essential to be aware of both federal and state regulations. While most people are familiar with the Securities Act and the SEC at the federal level, many are unaware of the impact of state securities laws, often referred to as "Blue Sky laws."
What are Blue Sky Laws?
Blue Sky laws are state regulations that govern the issuance and sale of securities. The term "Blue Sky" originated from a 1917 court case in Kansas where a judge referred to the need for states to regulate securities to protect against speculative schemes that had no more substance than so many feet of blue sky. Today, Blue Sky laws are included in the Uniform Securities Act, which is followed by most states.
How Do Blue Sky Laws Impact Investors?
While federal law (specifically, Section 18 of the Securities Act) generally preempts state regulations of securities, Blue Sky laws still play a crucial role in securities regulation. States are allowed to enforce certain regulations, including:
Fraud Enforcement: States can enforce laws related to fraud in the sale of securities. Regulation of Broker-Dealer Conduct: States can regulate the conduct of broker-dealers operating within their jurisdiction.
Regulation of Funding Portals: States can regulate funding portals used for securities offerings. Blue Sky Filings and Fees One of the key aspects of Blue Sky laws for investors is the requirement for notice filings and the associated fees. For example, under Regulation D, which is commonly used for private capital raising, companies may need to file a Form D with the SEC for federal compliance. However, they may also need to file notice filings with state regulators and pay associated fees.
These fees can vary widely, ranging from zero to several hundred dollars per state, depending on factors such as the number of investors and the state's fee schedule. Failure to comply with Blue Sky laws can result in penalties, including the requirement to return investor funds with interest.
Conclusion
While federal securities laws often take center stage, it's essential for investors to understand and comply with state Blue Sky laws. These laws play a critical role in protecting investors and ensuring the integrity of securities markets at the state level. By being aware of and complying with Blue Sky laws, investors can navigate the regulatory landscape more effectively and avoid potential pitfalls.