Blue sky laws were designed to protect investors from fraudulent sales practices and activities. Most blue sky state laws require companies that make offerings of securities to register their offers before they can be sold to a particular state. These laws typically mandate licenses for brokerage firms, investment advisors, and individual brokers offering securities in their states. The laws require that private investment funds register in every state they wish to conduct business, in addition to their home state.
What is the “Blue Sky” History?
The term “blue sky” came from a Supreme Court case determined in 1917, that was based on broad speculative investment schemes. The court described the activity to have no more basis than so many feet of “blue sky.”
During the Roaring 20’s, speculative investment schemes were universal. Companies would issue stock or promote real estate. Since the Securities and Exchange Commission (SEC) had not yet been established, there was no oversight of the investment and financial industry, and securities were sold without evidence to support these claims. These activities contributed to the inflation of the stock market before the 1929 crash. By 1933, Congress began regulating securities in all states except Nevada, which did not have blue sky laws. During the Great Depression, Congress eventually established the SEC.
It was not until 1956 when congress passed the Uniform Securities Act which provided the framework and guidelines for states to craft securities legislation. Many states began incorporating these laws, and it eventually became nicknamed the blue sky law.
Blue Sky Laws in Florida
Blue sky laws vary from state to state, but they share certain features in the approach to prevent misinformation about investment returns and risks. These laws create liability for fraudulent sales in two ways.
First, the laws require that companies register the securities that will be offered or sold within the state, unless the offerings fall within an exemption that is typically listed in the statute. The state’s securities agency or commission will administer this process, which essentially prevents fraudulent transactions by allowing the state to review the offerings and ensure that individuals participating in the market are qualified and regulated by the state. Blue Sky laws operate on a disclosure-driven basis, and mandate companies to accurately disclose information that helps investors make well-informed decisions.
Second, the blue sky laws now have an anti-fraud provision that creates liability for any fraudulent statements or failure to disclose information. Depending on the state law, there are specific kinds of statements and acts that can form the basis of a fraud claim. Although each state has different causes of action, remedies, and procedures, most states include the decision of the transaction, forcing the seller to give up their profit.
Florida has had its own blue sky laws for a long time, and certain securities are required to be registered with the state. Governor Crist amended the Florida Securities and Investor Protection Act into law in 2009. Before this amendment, the state’s attorney general could not prosecute securities fraud, since it was originally left to federal authorities. After the 2008 recession, however, the state changed its laws seeing how the state is home to many wealthy retirees. Florida blue sky laws now authorize the state to investigate and enforce anti-fraud provisions of the statute.
