A Practical Guide to Blue Sky Law Compliance

When it comes to securities law compliance, most discussions regarding private equity and issuers tend to focus only on the federal rules and regulations. The bulk of articles examining securities law issues or compliance speak only to the Securities and Exchange Commission’s (SEC) approach and enforcement actions. However, this tells only half the securities law story. For issuers and private equity investors, the other half of the compliance story lies with the states. State “blue sky laws” may not get a lot of press, but they play an important role in compliance. Obeying state “blue sky laws” is every bit as critical as complying with the Securities and Exchange Act of 1934 (“Securities Act”). 

The difficulty lies in the fact that each state has its own securities laws and regulations, making compliance across jurisdictions confusing and difficult. The good news is, however, that state securities laws do have some common requirements. So let’s take a look at state blue sky laws and what issuers can do to stay compliant across multiple jurisdictions.

A Brief Overview of Blue Sky Laws 

Before we get to that, however, let’s touch on what blue sky laws are and when they apply to issuers and private equity offers.

While not completely clear where it came from, the term “blue sky laws” appears to have originated in the 1900s in Kansas, where it was used to refer to some type of securities fraud in which the securities being sold were said to be backed by nothing more than “blue sky.” In 1917, the Supreme Court declared the constitutionality of state blue sky laws in Hall v. Geiger-Jones, 252.U.S. 539 (1917). In that case, the court declared that, in the words of a prior case, the purpose of the state securities law in question was aimed at “preventing speculative schemes which have no more basis than so many feet of ‘blue sky’…”. After that, the term stuck and is regularly used to refer to state securities laws.

Like the federal securities laws, state blue sky laws aim to protect investors and prevent fraud. They require brokers to be properly licensed, and securities to be registered with the state authorities. 

Under the Uniform Securities Act of 1956 (“Uniform Securities Act”), every individual state has its own regulatory authority that is responsible for enforcing that state’s “blue sky laws.” While the Uniform Securities Act aimed to provide a consistent and cohesive approach to securities regulation among the states, not all states have adopted it. As a result, many states have their own set of laws, and there are no particular registration requirements common to all the states. For issuers, this makes compliance especially difficult and complicated because it means that complying with the laws of one state does not necessarily mean you are meeting the legal requirements of another. 

Compounding this difficulty is the fact that although the state securities laws have been preempted by federal law under the National Securities Markets Improvement Act of 1996 (NSMIA), for certain “covered securities” the states can still impose filing fees and notice requirements (although not registration requirements) on these securities. In other words, just because an issuer has complied with the federal rules on registration for exempt offerings like those under Regulation D, they may still need to file a notice with each state in which that offering is made. If there is any duplication in requirements between the federal law and the state laws, the federal law will supersede the state law requirements.

Regardless of whether an offering is registered or non-registered according to the SEC, or whether a company is a reporting or non-reporting company, issuers must comply with all blue sky laws in addition to the federal rules.

What are the Commonalities of Blue Sky Laws?

As noted, blue sky laws vary from state to state. Yet they do have some common requirements. Generally speaking, whereas the federal laws are more focused on disclosures, the state laws, while also requiring disclosures, tend to a more merit-based review.

Some of the requirements that most state blue sky laws share include:

• securities registration requirements for non-exempt securities,

• broker licensing requirements,

• anti-fraud provisions,

• fees and notice requirements,

• disclosure requirements.

In addition, all blue sky laws create liability for an issuer’s failure to comply with the law’s requirements. Each state has its own enforcement provisions and can impose fees and fines for noncompliance. 

Staying Compliant Over Multiple Jurisdictions. 

For issuers offering or selling securities in multiple jurisdictions, compliance can get complicated. First, it is essential to understand that, for nonexempt securities, an issuer must register its securities in every state in which any one of its investors resides. In other words, if participating investors reside in 15 different states, the issuer must register its securities in each one of those states. And it doesn’t matter how many investors live in that state. If even one investor lives there, registration is required.

Next, bear in mind that even exempt securities — like those listed on the NYSE or NASDAQ, or “covered securities” — will still be subject to a state’s anti-fraud provisions or notice requirements. Most states require that a Form D “notice” be filed within 15 days of the first sale of an exempt security in that state. 

Given the multitude of different laws and requirements, how can an issuer selling securities across multiple jurisdictions remain compliant?

According to experts, some best practices for staying compliant across jurisdictions include (but are not limited to):

• Establishing a structured and proactive approach to state law filings,

• Reviewing the securities regulations of each state in which you may be selling securities, long before you start any sales activities,

• Checking for state registration exemptions,

• Review each state’s requirements for Form D filing notices,

• File your Form D with the SEC first (because this often triggers state law 15-day filings),

• Track all filing dates,

• Use the Electronic Filing Depository (EFD) run by the North American Securities Administrators Association (NASAA) to file and pay fees in multiple states,

• Enlist the assistance of experienced securities counsel and compliance experts,

• Conduct reviews annually,

• Document everything.

Staying compliant with the blue sky laws across multiple jurisdictions may not be an easy task, but it is a critical one. Even if state law does not completely govern an issuer’s capital raise, obeying state blue sky laws is just as important as complying with the federal securities laws.

Regulatory compliance is complicated, but staying compliant is at the heart of doing business with integrity. Compliance in private equity investment is constantly changing, and the laws that govern securities are numerous. Nevertheless, blue sky laws should not be overlooked or treated lightly. By taking a proactive approach, using good business sense, and taking basic precautions, issuers can avoid the costly and time-consuming burden of noncompliance. 

Whether a company’s securities are regulated by federal law, state law, or both, issuers and investors need to be aware of the importance of securities law compliance. The U.S. securities laws touch on a vast number of financial and investment issues of importance to all investors and issuers. VerifyInvestor.com makes verifying accredited investors easy, cost-effective, secure, and reliable. Our services (which also include AML/KYC checks, qualified purchaser, and qualified client verification) are always code-compliant and confidential. We help companies fully and easily comply with their legal obligations to verify accredited investors.