Blue Sky Laws

Blue sky laws are the securities laws of the individual U.S. states, so called by long usage rather than by statute. The SEC's description is that "every state has its own set of securities laws" designed "to protect investors against fraudulent sales practices and activities", that most of them require a company offering securities to register the offering in that state unless a state exemption applies, and that "the laws also license brokerage firms, their brokers, and investment adviser representatives". They are administered by state securities regulators rather than by the SEC, and they predate the federal securities statutes: NASAA records that Kansas adopted the first securities law in 1911 and that Congress did not begin enacting federal securities laws until the 1930s.

That description of state registration needs one important qualification, because it has been only half true since 1996. Section 18 of the Securities Act now removes a large category of offerings from state registration entirely. The result is a divided field rather than two parallel systems: for covered securities, states may not require registration and may not judge the merits, but they retain their antifraud powers and their licensing role, and for everything else state law applies with full force.

Where the name came from, and the sentence almost everyone gets wrong. The phrase reached the U.S. Reports in 1917, in Hall v. Geiger-Jones Co., one of three cases decided on January 22 of that year that the Reports style "The Blue Sky Cases", the others being Caldwell v. Sioux Falls Stock Yards Co. on the South Dakota statute and Merrick v. Halsey & Co. on the Michigan one. Upholding Ohio's law, the Court wrote that the name given to it "indicates the evil at which it is aimed", and then borrowed a phrase from an earlier case to say what that evil was: speculative schemes with no more basis than so many feet of blue sky. What the Court did not do is coin the phrase. It attributes the wording to a cited case, and in the very next clause attributes a second colorful description to counsel in another case. Any account that credits the Supreme Court with inventing the term contradicts the opinion it is citing.

The federal preemption is narrower and stranger than "federal law wins". Section 18 of the Securities Act, in the form Congress gave it in 1996, provides that no state law "requiring, or with respect to, registration or qualification of securities" shall apply to a covered security, and separately bars any state from imposing conditions "based on the merits of such offering or issuer" on the offer or sale of one. That second clause ends state merit review for covered securities, and merit review is the thing state regulation could do that the federal system does not: a state examiner could refuse an offering as unfair or inequitable, while the SEC describes its own registration process as disclosure examined for compliance with disclosure requirements, leaving investors "not the government" to judge whether to buy. The statute then lists what counts as a covered security, including a security listed or authorized for listing on a national securities exchange, a security issued by a registered investment company, a security sold to "qualified purchasers" as the SEC defines that phrase by rule, and securities sold in several categories of exempt offering.

What the states kept is not a remnant. Section 18 expressly preserves state authority in two directions. On fraud, a state's securities regulator retains jurisdiction under state law "to investigate and bring enforcement actions" with respect to "fraud or deceit" or "unlawful conduct by a broker, dealer, or funding portal". On paperwork, the section permits states to keep requiring that documents filed with the SEC also be filed with them, together with periodic sales data, "solely for notice purposes and the assessment of any fee". So an issuer selling a covered security into a state may still owe that state a notice filing and a check; what it no longer owes is a registration or a merit determination. And the SEC's own summary of state law is a reminder that registration of offerings was never the whole of it: licensing of brokerage firms, their brokers and investment adviser representatives runs through state law and was untouched.

The overlap with federal antifraud law is deliberate. A single course of conduct can violate the federal antifraud provisions and state law at the same time, and the state action does not have to wait for the federal one. The state route also carries a remedy the federal one does not: because the state licenses the firm and the individual, it can act against that license administratively rather than only by going to court.

Most state statutes share a common ancestor. NASAA records that the current uniform model is the Uniform Securities Act of 2002, which supersedes the Uniform Securities Act of 1956 and the Revised Uniform Securities Act of 1985 as amended in 1988, and that most state securities laws are based on one of the three models, with some states drawing on more than one and a few having laws that are unique or only loosely based on a model. The practical consequence for a reader is that state securities law is familiar in shape from one jurisdiction to the next and different in detail, so a specific answer requires the specific state's statute.

A note on where the phrase does and does not appear. "Blue sky" is not federal statutory language. It appears nowhere in the short-title sections of the Securities Act or the Securities Exchange Act, nor anywhere in section 18, the provision that does the preempting. It survives because it is a useful shorthand for a body of law with fifty-odd separate names.

For any offering, the state question runs in a fixed order:

1. Is the security a covered security under section 18? Exchange-listed securities, registered investment company shares, securities sold to qualified purchasers as the SEC defines them, and several categories of exempt offering are covered.

2. If yes, state registration and merit review are off the table. A notice filing and a fee may still be required, and the state's antifraud authority and licensing power are unaffected.

3. If no, state law applies in full. The offering must be registered in each state where it is sold or fit a state exemption, and in some states an examiner may still assess the offering's fairness.

4. Separately, check the people. Whether the firm and the individual selling are licensed in that state is a state-law question in every case, and it is the one an ordinary investor can check fastest.

The order matters because the two questions are usually answered by different parties. The issuer's counsel determines the security's status under section 18; the investor can determine the seller's licensing status through the state regulator or the public brokerage and adviser databases without asking the seller anything.

Pros

• State regulators are closer to the conduct than a federal agency is, and their licensing power gives them a remedy that does not require litigation.
• Antifraud authority was expressly preserved, so preemption did not create a gap between what federal enforcement reaches and what state enforcement reaches.
• Merit review still applies to offerings that are not covered securities, which is where the least sophisticated buyers and the least examined deals tend to meet.
• A shared model act makes the fifty systems similar enough that a professional can work across them, and it is why state definitions usually track the federal ones.

Cons

• Fifty statutes, fifty regulators and fifty exemption schemes make multi-state compliance expensive, which is exactly what section 18 was enacted to reduce for larger offerings.
• Preemption removed merit review precisely for the securities most widely sold, so the protection survives mainly for smaller and more local deals.
• "Blue sky laws" is a nickname covering statutes that genuinely differ, and a general statement about them is almost always wrong somewhere.
• A notice filing is not a review. An issuer that has filed papers with a state has not been examined by it, and the filing can read to an investor like more than it is.