blue-sky law

n.
A law designed to protect the public from buying fraudulent securities.

State regulations designed to protect investors against securities fraud by requiring sellers of new issues to register their offerings and provide financial details. This allows investors to base their judgments on trustworthy data.

Investopedia Says:
The term is said to have originated in the early 1900s when a Supreme Court justice declared his desire to protect investors from speculative ventures that had "as much value as a patch of blue sky."

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Law of a kind passed by various states to protect investors against securities fraud. These laws require sellers of new stock issues or mutual funds to register their offerings and provide financial details on each issue so that investors can base their judgments on relevant data. The term is said to have originated with a judge who asserted that a particular stock offering had as much value as a patch of blue sky.

Popular name for state securities laws designed to safeguard investors from buying worthless securities. Blue sky laws vary from one state to another, although most have similar prohibitions against fraud and require registration of most securities offered for sale, with the exception of municipal bonds. Many states have patterned their securities laws after federal legislation.

State laws requiring the offeror of securities to give full disclosure, and register the offering as required by federal and state law.
Example: A Syndicator wishes to sell 10,000 units of a partnership to investors throughout the United States. He registers the offering with the Securities and Exchange Commission and complies with blue-sky laws in 50 states. The term comes from fraudulent practices of exaggerated offerings to investors, including part of the blue sky.

Law providing for state regulation and supervision of the issuance of investment securities. The prevention of gross fraud is the primary purpose of these laws, which include procedures and regulations with respect to broker licensing, registration of new issues, and formal approvals by appropriate governing bodies.

Blue Sky Laws are state laws designed to prevent fraud in the sale of corporate securities. These laws preceded federal regulation of securities, which began in 1933. Kansas enacted the first statute in 1911, and by the end of 1923, forty-five of the forty-eight states had followed suit. The term "blue sky" arose when the U.S. Supreme Court stated in Hall v. Geiger-Jones Co. (1917) that the laws were intended to prevent speculative schemes based on nothing more than "so many feet of 'blue sky.'" The requirements of blue sky laws vary from state to state, but generally stipulate that securities offerings and brokers be registered.

Bibliography

Hazan, Thomas Lee. The Law of Securities Regulation. 3d ed. St. Paul, Minn.: West Publishing, 1998.

Ratner, David L. Securities Regulation in a Nutshell. St. Paul, Minn.: West Publishing, 1992.

—Katherine M. Jones

This entry contains information applicable to United States law only.

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 selling documents for accuracy and completeness. Blue sky laws also often regulate securities brokers and sales- people.

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 decision 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 corporations and securities dealerships that offer investments for sale to the public in a particular state. These laws are in many cases adopted from the Uniform Securities Act, and are usually 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 transactions.

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 "stock-peddling" 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.

See: securities; stock.