What Is a Blue Sky Filing for Securities?

Blue sky laws are state-level regulations designed to protect investors from fraudulent investment schemes. These laws require the registration of securities offerings and the individuals or firms involved in selling them. The term “blue sky” originated in the early 1900s, when a Kansas Supreme Court justice aimed to protect investors from speculative ventures that had “no more basis than so many feet of ‘blue sky.'”

The Purpose and Scope of Blue Sky Laws

Blue sky laws exist primarily to safeguard investors by mandating disclosure and preventing fraud at the state level. These regulations complement federal securities laws, such as the Securities Act of 1933, by providing an additional layer of oversight.

The scope of blue sky laws extends beyond the securities themselves, encompassing the individuals and entities involved in their sale. This includes broker-dealers, investment advisers, and their representatives who offer securities within a state. These laws often require licensing and registration for these professionals, ensuring they meet specific standards of conduct and financial responsibility.

Who is Subject to Blue Sky Filings

The obligation to make blue sky filings applies to issuers of securities, which are the companies or entities offering stocks, bonds, or other financial instruments to investors. This requirement generally arises when an offering is made to residents of a particular state, regardless of where the issuer is based. Each state may have distinct filing requirements, reflecting the localized nature of these investor protection statutes.

Additionally, individuals and firms acting as broker-dealers or investment advisers are subject to blue sky filing requirements. These professionals must register or obtain licenses in each state where they conduct business or have clients.

Methods of State Registration

Securities offerings are registered with state securities regulators using methods often based on the Uniform Securities Act, a model legislation adopted by many states.

Registration by Coordination

One common approach is registration by coordination, used for offerings also registered with the U.S. Securities and Exchange Commission (SEC). This method streamlines the process, as state registration generally becomes effective concurrently with federal registration, provided the disclosure statement is on file for a specified period, often 10 to 20 business days.

Registration by Qualification

Another method is registration by qualification, employed for offerings not registered with the SEC, such as intrastate offerings sold only within a single state. This involves a detailed state-specific review, requiring the issuer to submit comprehensive information about the company, the offering, and associated risks directly to the state administrator. Unlike coordination, registration by qualification requires affirmative approval from the state regulator before sales can commence.

Registration by Notification

A third method is registration by notification, sometimes referred to as filing. This approach is reserved for established companies with a history of earnings and operations that meet specific financial criteria, such as a minimum net worth or operating history. These companies only need to notify the state administrator of their intent to sell securities, and registration becomes effective automatically after a certain period, unless the state intervenes.

Key Exemptions from Registration

Not all securities offerings require full state registration under blue sky laws, as various exemptions exist. These exemptions can significantly reduce the compliance burden for issuers.

Exempt Securities

One category includes exempt securities, which are inherently exempt due to their nature or issuer, such as those issued by the U.S. government, state governments, certain banks, or non-profit organizations.

Exempt Transactions

Another category involves exempt transactions, which are types of sales that do not require full registration. Common examples include isolated non-issuer transactions, where an existing shareholder sells securities infrequently, or private offerings to a limited number of investors. Federal exemptions, such as those under Regulation D of the Securities Act of 1933 (e.g., Rule 506), often have corresponding state blue sky exemptions. Even when an offering is exempt from full state registration due to a federal exemption, states typically still require a “notice filing” and payment of a fee, which can range from a nominal amount to several hundred dollars, within a specified timeframe, often 15 days after the first sale in the state.