Blue Sky law

A term used to refer to U.S. state laws designed to protect the public against securities fraud by regulating the sales of securities to various persons protected under those states’ laws. The provisions can be complicated for foreign startups to deal with, as it is easy to inadvertently find that transactions with an investor with relatively insubstantial connections with the U.S. or a particular state are still covered by such laws.

The term originated with a judge’s ironic comment that a particular stock had as much value as a “patch of blue sky.” Blue sky laws supplement U.S. Federal Securities Law and it should be understood that one may avoid a violation of the Federal Law and still be caught under the a state’s Blue Sky law. Most Blue Sky laws were enacted before 1933, i.e., before US Federal Securities law existed, and under those laws were until recently specifically not preempted.  More recently, some of the provisions typical of Blue Sky laws have been preempted under the Federal Securities Litigation Uniform Standards Act of 1998.