The State’s Blue Sky Laws Protect Investors from Possible Fraud

What is Blue Sky Law?

June 28, 2021, | AtoZ Markets – Blue sky law ensures that investors have protection from deceptive people and companies. The law differs from one state to another, but they all have one goal: to ensure that brokers, brokerage firms, and their offers have licenses.

Securities issuers must disclose the terms of their offers and any material information that affects the security. Given that this law is state-based, they can alter the needed requirements for registration. The state agents will do a merit review of the offer if it is reasonable enough to sell to investors.

History of blue sky laws

In 1900, a Kansas Supreme Court justice said that he wants to protect investors from questionable businesses with "no more basis than so many feet of 'blue sky.'"

Moreover, the blue sky already existed in 1911 in a way when the term became widespread. However, they were not strong and firm enough with their enforcement. The frauds got away by merely deceiving other people in another state.

Around 1929, there was a world-wide economic decline that originated in the US called the Great Depression. Many people created deceptive money schemes that promise high revenues in return. It spread all over the world. Naïve investors fell into the tricks of scam companies that want to make fast money.

Great Depression caused a massive hurt in the economy. However, this taught people not to fall into the same scheme again. Lawmakers created the blue sky due to this reason. Now, new securities need to prove that they are registered and legitimate. In 1933, every state except Nevada adopted blue sky laws.

Importance of blue sky laws

The law helps investors make decisions by providing transparent and trustworthy data. Registration of securities is a must for a company before they can offer or sell. The Uniform Securities Act of 1956 is the act that most states followed. It is a model law that guides each state in making its customized legislation. These are its main provisions:

  • Reason for existence. The issuer is committed to the business. The business is not bankrupt, blind pool, blank check issuer, or shell business.
  • Price. The security's price is reasonable.
  • Unsold allotment. There is no connection to any unsold allotment given to a dealer with underwritten security.
  • Asset base. The issuer owns the necessary amount of assets.

In short, a securities dealer can't advertise a company stock sale unless it follows SEC and local state regulations.

Even after blue sky's implementation, there are still some riffs since states have various laws and different takes. Nonetheless, each state shares something in common in their methods. Everyone ensures that no agent should overpromise or under-deliver to any investor. There are two crucial blue sky law points about the sales process and liability for scam sale.

  1. Securities should register their offers or intended offers in the state if there is no exemption.
  2. Brokerage firms, securities issuers, and brokers should register and get a license in the state where they work. Some states may require more certificates from brokers.

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