State Securities (Blue Sky) Laws
Blue sky laws is the term given to the myriad state regulations that are written to protect investors. The term blue sky 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.” In the United States legal system, there are federal and state statutes that regulate the sale of securities. With the one possible exception, both federal and state securities laws must be considered in an offering.
When selling a security in a private placement, the company must find an exemption at both the federal and state level. Some state exemptions mirror federal exemptions, and other state exemptions are unique to the state. Exemptions are not mutually exclusive, such that an offering may be able to claim multiple exemptions.
State securities laws regulate the sale of securities within their borders. When determining which state securities law applies, look to the state in which the purchaser resides. It makes no difference whether you sell a security to a Texas resident while attending a meeting in California—Texas blue sky laws apply.
Exemptions from registration of securities vary among the states, but there is some common ground. Most state exemptions allow for ten purchasers during any twelve-month period, if the seller reasonably believes the buyer is purchasing for investment (as opposed to wanting to resell the securities) and no commission or other remuneration is paid for soliciting any buyer. Most states set a dollar limit on these exemptions and require a disclosure document to be drafted, and as always, antifraud provisions apply. Also, these state transactional exemptions are not mutually exclusive, so you may qualify for one or more at the same time. Check with your state securities administration or an attorney experienced in securities offerings before undertaking any offering of securities.