Whenever a company sells securities, it has to worry about two things: Federal law, regulated by the Securities and Exchange Commission, and the law of the state where the investor resides (the primary residence or primary place of business for the investor). These state-regulated securities laws are called “blue sky” laws.
Why Are They Called “Blue Sky”?
The term originated in the early 1900s as states around the country enacted various laws to protect investors from “Blue Sky merchants.” These fraudsters would go around selling stakes in companies, gold mines, etc. that had no more assets backing them up than “so many feet of ‘blue skies’.” Newspapers carried the stories and perpetuated the colloquial term, which stuck.
Do Blue Sky Laws Matter?
The dichotomy between state and federal securities laws didn’t exist at the time the states were first creating their own Blue Sky laws because the Securities and Exchange Commission (SEC) wasn’t created until 1933. So, while the two aren’t at odds with one another, the situation has led to some interesting tensions over the years—particularly for privately held companies seeking exemptions from registration.
Most companies that want to sell securities, don’t do so on the New York Stock Exchange. Filings for public offerings generally require an amount of time and money to prepare that is prohibitive for most closely held businesses. Such companies, instead, rely on exemptions.
Until 10–15 years ago, companies had to find an exemption both to federal securities laws and to state-specific, Blue Sky exemptions in any state where they were selling securities. The law changed, though, and federal securities law now mostly preempts state law.
Preempted But Not Irrelevant
That doesn’t mean state laws don’t matter. Instead, companies only have to worry about the three F’s: Fees, Filings, and Fraud. Even if you comply with a federal law exemption, you still have to consider the state where the investor resides because the state typically wants you to file the exemption form and pay a fee. These fees will vary from state to state.
Typically, the filings are required after the sale of securities in that state, except in New York, where there’s a pre-filing requirement. There are a couple states, like Florida, that don’t have any filing requirements at all. For these states, in theory, as long as you comply with the federal exemption, there would be no state fees and no state filings. But, again, you still cannot commit fraud.
Read The Fine Print
It’s also possible to sell securities in a single state and choose to forego federal securities exemptions. This path can be dangerous as Blue Sky laws can get quite particular.
Here in Florida, for instance, if you’re going to forego federal law and seek an exemption under Florida securities laws, there are very specific compliance requirements. If you offer securities to five or more people in the state of Florida, you have to notify the investors of their three-day “right of rescission.” Should you fail to inform them of their right, they can exercise that right at any time. You may have to refund the initial investment plus interest and attorneys’ fees.
How Can We Help?
Securities law is complex and nuanced. If you’re trying to raise capital, be realistic about the risks to your future business of sloppy legal compliance and have a qualified business attorney handle the securities disclosures.
We advise closely held businesses on private placement securities offerings, exemption filings, and more. Call us at (407)649-7777 or submit the contact form below to get help with raising capital for your business.
