Blue Sky Laws

Have you heard the term but not understand what it means?  Many securities laws are created by the federal government (Washington) for the purpose of protecting investors. The Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) are the main enforcers of the nation’s securities laws. However, each individual state is permitted to, and does have their own laws which regulate investment practices within their state.  “Blue Sky Laws” are known as each individual states laws and rules that govern securities.

The term originated in 1917, Justice McKenna of the United States Supreme Court wrote an opinion on a particular case which dealt with the constitutionality of state securities regulations. In Hall vs. Geiger-Jones Co., 242 U.S. 539 (1917), which is comprised of three cases, Justice McKenna 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.” Even if the descriptions be regarded as rhetorical, the existence of evil is indicated, and a belief of its detriment; and we shall not pause to do more than state that the prevention of deception is within the competency of government and that the appreciation of the consequences of it is not open for our review.

The Hall cases have become known as The Blue Sky Cases, and Justice McKenna as the author of the phrase.

BLUE SKY LAWS. A popular name for state securities laws, the first of which was enacted in Kansas in 1911. Predating federal securities regulation, state securities laws provided for the regulation and supervision of securities offerings and sales in order to protect citizen-investors from investing in fraudulent companies. These state laws became known as BLUE SKY LAWS when a judge of the period stated that certain speculative securities schemes had no more substance than so many feet of “blue sky.” Most blue sky laws require the registration of new issues of securities with a state agency that reviews selling documents for accuracy and completeness. As well, blue sky laws often regulate securities brokers and salesmen.