What is Blue Sky Law?

Legal Definition
A blue sky law is a state law in the United States that regulates the offering and sale of securities to protect the public from fraud. Though the specific provisions of these laws vary among states, they all require the registration of all securities offerings and sales, as well as of stockbrokers and brokerage firms. Each state's blue sky law is administered by its appropriate regulatory agency, and most also provide private causes of action for private investors who have been injured by securities fraud.

The first blue sky law was enacted in Kansas in 1911 at the urging of its banking commissioner, Joseph Norman Dolley, and served as a model for similar statutes in other states. Between 1911 and 1933, 47 states adopted blue-sky statutes (Nevada was the lone holdout). Today, the blue sky laws of 40 of the 50 states are patterned after the Uniform Securities Act of 1956. Historically, the federal securities laws and the state blue sky laws complemented and often duplicated one another. Much of the duplication, especially with regards to registration of securities and the regulation of brokers and advisors, was largely preempted by the Securities and Exchange Commission with the National Securities Markets Improvement Act of 1996 (NSMIA). This act, however, left some regulation of investment advisors and much of the fraud litigation under state jurisdiction. In 1998, state law securities fraud claims were expressly preempted by the Securities Litigation Uniform Standards Act from being raised in lawsuits that were effectively class actions by investors, even if not filed as class actions.
-- Wikipedia
Legal Definition
A state law that imposes standards for offering and selling securities. Such laws aim to protect individuals from fraudulent or overly speculative investments.
Overview
Originally prepared by Deepa Sarkar of the Cornell Law School Securities Law Clinic.

Individual states adopted legislation that regulated the sale of securities in the decades prior to enactment of the federal securities laws. The term “blue sky” suggests the type of fraudulent activity targeted by state securities laws; in Hall v. Geiger-Jones Co., Supreme Court Justice McKenna used the phrase to characterize “speculative schemes which have no more basis than so many feet of ‘blue sky’ .” Blue sky laws developed in the frenzied years leading up to the Great Depression, in response to fact that more and more ordinary investors were losing money in highly speculative or fraudulent schemes promising high investment returns, such as oil fields and exotic investments in foreign countries. Initially, each state enacted its own securities laws; by 1933, the eve of federal securities legislation, all states except Nevada had blue sky laws. Securities regulation in the United States consisted of this nationwide patchwork of state laws, which became even more complicated once Congress passed federal securities laws that duplicated some of the areas regulated by blue sky laws. For example, state law and federal law often overlapped regarding registration and liability. Some uniformity resulted from the Uniform Securities Act of 1956, which many states substantially adopted, but state laws still varied widely. The lack of uniformity is still apparent today, and even where the language of statutes is the same in different states, the effect of the law often differs significantly due to diverging state court interpretations.

Despite the differences between statutes from state to state, the blue sky laws share certain features in their approach to prevent sales agents from promising unrealistic returns and misinforming investors about the investment risks. The state laws provide for oversight of the sales process and create liability for fraudulent sales in two ways. First, the laws require the registration of securities that will be offered or sold within the state, unless the offerings fall within specified exemptions from registration. In addition, brokerage firms, issuers selling their own securities, and individual brokers must be registered with and licensed by the state; some states also require additional certifications for brokers. These processes are administered by a state’s securities agency or commission. The registration process for securities and securities transactions prevents fraudulent transactions by allowing state security commissions to review the securities offerings and ensure that the individuals transacted in the securities markets are qualified and regulated by the state. Similarly to the federal laws, the blue sky laws generally operate on a disclosure-driven basis, and mandate that companies accurately disclose information that will help investors make informed decisions.

Second, blue sky laws have antifraud provisions that create liability for any fraudulent statements or failure to disclose information as required. The specific kinds of statements and acts that can form the basis of a fraud claim will depend on a state’s statutes and case law. The right of action available and remedies available to investors bringing private suits also differs from state to state, but may include rescission of the transactions, forcing the seller to give up profits, or other measures of damages. In New York, the securities statute is the Martin Act, which notably does not provide for a private right of action. Under this act, only the attorney general, not individual plaintiffs, can sue for fraudulent sales of securities. Individual investors must instead bring an action under for common-law fraud and breach of fiduciary duty.

Given the size of many companies and brokerage firms and the fact that most wish to sell securities in multiple states, the blue sky laws make transactions more difficult because companies must comply with the law of each state where they sell or offer securities. In reaction, Congress has passed legislation over time that pre-empts blue sky laws where laws duplicate federal law. States now have limited power to register and review securities. The 1996 National Securities Markets Improvement Act of 1996 (NSMIA), amended Section15(h) of the Securities Exchange Act of 1934. Now, federal law controls in certain aspects of the regulation of broker-dealers, such as record-keeping, financial standards, and operating requirements. In addition, the NSMIA amended the Securities Act of 1933 so that certain types of securities are no longer subject to state registration laws. However, offers and sales must still be registered, market participants must still register per a state’s blue skies laws, and state fraud laws are still available as causes of action for individual investors.
Legal Definition
a statute that prevents selling the stock of a fraudulent company.
Legal Definition
A try to prevent schemes to protect the niave investor.
Legal Definition
A statute for the regulation of investment companies.
-- Ballentine's Law Dictionary