Business, Legal & Accounting Glossary
The laws that aim to protect people from investing in sham companies that consist of nothing but “blue sky.”
Blue sky laws require that companies seeking to sell stock to the public submit information to and obtain the approval of a state or federal official who oversees corporate activity.
n. laws intended to protect the public from purchasing stock in fraudulent companies that lack substance, such as those selling swampland, non-existent gold strikes and dry oil wells, or who have no assets besides a post office box.
Blue sky laws require that corporations advertising and selling shares to the public must get approval from the state corporations commissioner and/or the Securities and Exchange Commission after providing details on financing and management.
The term comes from the intent to prevent the existence of corporations that have nothing behind them but “blue sky.
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 among states, they all require the registration of all securities offerings and sales, as well as of stockbrokers 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 at the urging of its banking commissioner, Joseph Norman Dolley, and served as a model for similar statutes in other states. Between 1911 and 1933, 47 states adopted blue-sky statutes (Nevada was the lone holdout). Today, the blue sky laws of 40 of the 50 states are patterned after the Uniform Securities Act of 1956. 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 preempted 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.
The origin of the term, “blue sky” as applied to securities fraud requires further research. Its earliest cited use by the United States Supreme Court 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. Oddly, McKenna is frequently (and erroneously) given credit for inventing the term, even though: (a) J.N. Dolley used the term when pushing for passage of the Kansas statute in 1910, and( b) McKenna’s own opinion in Hall itself attributes the term 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.
Kansas banking commissioner Dolley, railing against “blue sky merchants” when pushing for passage of the Kansas statute in 1910, observed that certain fraudulent investments were backed by nothing but the blue skies of Kansas. The Oxford English Dictionary has a cited use dating to 1906. Also, The New York Times (and other newspapers around the country) frequently reported on the blue sky laws as various states began to enact them between 1911 and 1916. The newspapers expressly used the term “blue sky” to describe the laws.
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This glossary post was last updated: 5th May, 2020 | 2 Views.