Blue Sky: The Fifty Regulators Behind the One You Are Watching

Federal securities law gets the attention. State securities law — Blue Sky law — is where a surprising number of offerings actually go wrong, because issuers forget it exists.

The name comes from an early court decision describing speculative schemes with no more basis than so many feet of blue sky. Every state has its own securities statute, its own regulator, and its own registration and exemption framework. Complying with the SEC does not satisfy them.

Here is the framework you need.

Some offerings are covered securities under the National Securities Markets Improvement Act, which preempts state registration. Rule 506 offerings under Regulation D are covered. Securities listed on the New York Stock Exchange or Nasdaq are covered. Regulation A Tier 2 sales to qualified purchasers are covered.

But preemption of registration is not preemption of everything. States retain authority to require notice filings and fees, and they retain their antifraud authority in full. A Rule 506 offering still requires a Form D notice filing in each state where you sell, generally within fifteen days of the first sale in that state, with a fee. Miss those and you have a problem in that state even though your federal exemption is intact.

And plenty of offerings are not covered at all. Rule 504 offerings. Intrastate offerings. Regulation A Tier 1. Direct public offerings on Form S-1 where the security is not exchange-listed — this one surprises people. Registering with the SEC does not preempt state law unless the security ends up listed on a national exchange. If you are doing a DPO into the over-the-counter market, you need to register or find an exemption in every state where you intend to sell.

Some states apply merit review. The regulator evaluates whether the offering is fair to investors, not merely whether it is adequately disclosed. That is a different standard than the Commission applies, and an offering the SEC would clear can be blocked at the state level.

Practical guidance. Decide early which states you will actually sell into, and limit the offering to those states in writing. Most issuers do not need fifty-state clearance. They need five, done correctly.

And keep records of where every investor resided at the time of sale. That is the fact that determines which state's law applies, and it is the fact nobody can reconstruct two years later.

This is Inside Securities Law. I'm Frederick M. Lehrer. General information, not legal advice.