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What is the blue sky law?

A blue sky law is a state law regulating the offering and selling of securities. The purpose of these laws is to protect investors from broker fraud or bogus investments. The name “blue sky” comes from a quotation cited by the U.S. Supreme Court in Hall v. Geiger-Jones Co., 242 U.S. 539 (1917) describing the kinds of frauds the laws are intended to stop. The Court wrote that “[t]he 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[.]”

Most blue sky laws were enacted prior to the passage of the federal Securities Act of 1933. The first blue sky law was passed in Kansas in 1911, and by 1933, forty-nine states had passed blue sky laws. Today, the majority of states with blue sky laws have modeled their statutes on one of the Uniform Securities Acts drafted by the Uniform Law Commission.

When Congress enacted the various federal securities laws, Congress decided not to preempt the state blue sky laws. Thus, state blue sky laws are valid, and states are free to create their own regulations on the offering and sale of securities, so long as those regulations do not conflict with a federal statute.

Blue sky laws typically require various forms of registration in order to deter fraud. Most brokers, brokerage firms, and securities issuers must be registered with the state securities agency. Likewise, most securities sold within a state (unless falling within an exemption) must be registered. In addition, blue sky laws generally make issuers or brokers liable for fraudulent statements or omissions made in the sale of securities.

Individuals may be able to sue the broker or issuer for rescission of the sale or for damages, depending on the state. For instance, Florida’s blue sky law allows an individual to sue, in most instances, for rescission only. Some state blue sky laws, such as New York’s Martin Act, do not give individuals the right to sue; instead, only the state securities agency may take legal action for a violation of the statute.

You can read more information about Florida’s blue sky law at Statutory Damages Under the Florida Securities and Investor Protection Act: How to Calculate and Apply Rescission Damages.


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