Blue sky compliance: Overview, definition, and example
What is blue sky compliance?
Blue sky compliance refers to the adherence to state securities laws in the United States, known as Blue Sky Laws, which regulate the offer and sale of securities to protect investors from fraud. These laws require companies that issue securities to register their offerings with the appropriate state authorities and ensure that the offerings meet certain standards of transparency, fairness, and disclosure.
The term "Blue Sky" comes from the idea of protecting investors from securities that are not grounded in reality, or that lack the necessary information for an informed investment decision. Blue sky compliance ensures that a company’s securities offering is properly registered, or exempt from registration, in each state where it intends to sell securities.
Why is blue sky compliance important?
Blue sky compliance is important because it ensures that companies issuing securities are in full compliance with state-specific securities laws, which help protect investors and maintain the integrity of the securities market. Failure to comply with Blue Sky Laws can result in penalties, legal liabilities, and invalidation of securities offerings.
For businesses, blue sky compliance ensures that their securities offerings are legally sound and can be marketed and sold to investors across multiple states. For investors, it provides assurance that the securities being offered comply with state regulations designed to protect them from fraud and deception.
Understanding blue sky compliance through an example
Imagine a company that is planning to issue new stock to the public as part of a capital-raising effort. The company must ensure that its offering complies with the relevant Blue Sky Laws of the states where it intends to sell the securities. To do this, the company will either need to register the offering in each state or rely on an exemption if the offering meets specific criteria.
For example, if the company is selling securities only to accredited investors (a type of investor considered to have a high level of sophistication or wealth), it may be able to take advantage of certain exemptions from Blue Sky registration in some states, but still needs to ensure compliance with those exemptions.
In another example, a business that is issuing bonds may need to file a notice or provide specific disclosures in each state to comply with Blue Sky Laws. If the company fails to comply with the laws in a specific state, investors in that state may have the right to rescind their purchases of the bonds.
An example of a blue sky compliance clause
Here’s how a blue sky compliance clause might look in a contract:
“The Company shall ensure that all securities issued under this Agreement are registered under applicable state Blue Sky Laws or qualify for an exemption from such registration. The Company agrees to file all necessary documents, including notices of exemption or registration, with the relevant state securities regulators in each state where the securities are offered. The Company shall provide the Investor with written confirmation of such compliance prior to the closing of the offering.”
Conclusion
Blue sky compliance is a critical aspect of issuing securities in the United States, ensuring that companies adhere to state-specific securities laws designed to protect investors from fraudulent or misleading investment schemes. By meeting the requirements of Blue Sky Laws, businesses can legally offer securities across multiple states while providing transparency and assurance to investors. Understanding and adhering to blue sky compliance is essential for both companies raising capital and investors seeking safe and informed investment opportunities.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.