Blue sky law

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A blue sky law is a state law in the United States that regulates the offering and sale of securities to protect the public from fraud. Though the specific provisions of these laws vary between states, they all require the registration of all securities offerings and sales, as well as of stock brokers and brokerage firms. Each state's blue sky law is administered by its appropriate regulatory agency, and most also provide private causes of action for private investors who have been injured by securities fraud.

The first blue sky law was enacted in Kansas in 1911, and served as a model for similar statutes in other states. Today, the blue sky laws of 40 of the 50 states are patterned after the Uniform Securities Act of 1956. The origin of the colloquial term, "blue sky law," is obscure. Its earliest cited use was in an opinion by U.S. Supreme Court Justice Joseph McKenna in Hall v. Geiger-Jones Co., 242 U.S. 539 (1917), a case that addressed the constitutionality of state securities laws. Though McKenna is frequently given credit for inventing the term, his opinion in Hall attributes it to an unnamed, earlier source:

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.

Historically, the federal securities laws and the state blue sky laws complemented and often duplicated one another. Much of the duplication, especially with regards to registration of securities and the regulation of brokers and advisors, was largely pre-empted by the SEC with the National Securities Markets Improvement Act of 1996 (NSMIA). This act, however, left some regulation of investment advisors and much of the fraud litigation under state jurisdiction. In 1998, state law securities fraud claims were expressly preempted by the Securities Litigation Uniform Standards Act from being raised in lawsuits that were effectively class actions by investors, even if not filed as class actions.

The Blue Sky Reporter published by CCH, Inc. gives regular updates on state securities statutes and regulations; CCH also publishes several other "Blue Sky" digests and desk volumes.

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