What Are Blue Sky Laws?
Blue Sky laws are another name for State Securities Laws. The first use of the term is unknown, but the first well-known use of the term was in 1917 by Supreme Court Justice Joseph McKenna. Justice McKenna wrote the Court’s opinion in Hall vs. Geiger-Jones Co., 242 U.S. 539 (1917), which upheld the rights of states to regulate securities. He wrote:
“The name that is given to the law indicates the evil at which it is aimed, that is, to use the language of a cited case, “speculative schemes which have no more basis than so many feet of ‘blue sky'”; or, as stated by counsel in another case, “to stop the sale of stock in fly-by-night concerns, visionary oil wells, distant gold mines and other like fraudulent exploitations.”
State Securities Laws
Unless preempted by federal law, each State regulates the securities of a company that are held by a citizen of the State. By way of example, unless preempted by federal law, the shares of an Ohio small business that are held by a citizen of Kentucky can be the subject of both the Ohio and the Kentucky Blue Sky Laws.
For a small business that has shareholders in several States it is wise to utilize a federal preemption to the registration requirements of the States’ Blue Sky Laws when possible.
Is My Small Business Exempt?
If your business has an exemption from the federal securities laws, you may be unclear on whether or not it is automatically exempted from a State’s securities laws. Security laws are complex. Whether your securities are exempt depends on which federal exemption you use.
A Federal Preemption Strategy for Securities
When circumstances permit, Business Patent Law, PLLC prefers to utilize Rule 506(b) of Regulation D to obtain and exemption from the “Blue Sky” laws. Use of Rule 506(b):
- Provides an exemption from the registration requirements of the federal securities laws
- Provides an exemption from the registration requirements of one or more States’ “Blue Sky” laws
- Does not limit the amount of capital that can be raised from the private offering
- Allows your company to offer a single class of stock to an unlimited number of “accredited” investors
- Reduces governmental and attorneys’ costs associated with your company’s private stock offering
Rule 506 (b) is not the only federal preemption to the Blue Sky Laws, but it is probably a more cost-effective strategy for your small business.
If you have questions about the securities laws, please contact Business Patent Law, PLLC and we will discuss possibilities for your business and intellectual properties.
If you would like to stay up-to-date with news that impacts your intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.