Blue sky filing: Overview, definition, and example
What is blue sky filing?
Blue sky filing refers to the process of registering securities with state authorities in the United States in compliance with state securities laws, often known as blue sky laws. These laws are designed to protect investors from fraudulent securities offerings by requiring companies to file specific disclosures and obtain approval before offering securities for sale to the public within a particular state.
The term "blue sky" is believed to refer to the idea of preventing speculative, worthless securities from being sold—essentially ensuring that only legitimate investments are offered to the public. Blue sky filings typically occur alongside federal registration, but they are state-specific and vary depending on the jurisdiction.
Why is blue sky filing important?
Blue sky filing is important because it provides a level of investor protection by ensuring that companies disclose relevant information and meet legal requirements before offering securities for sale. It helps reduce the risk of fraud by giving state regulators the opportunity to review and approve securities offerings within their jurisdiction.
For companies, blue sky filing ensures compliance with state laws, avoids legal complications, and builds investor confidence by demonstrating transparency and adherence to legal standards. For investors, it provides assurance that the securities they are purchasing are subject to state regulation and oversight, minimizing the risk of fraudulent schemes.
Understanding blue sky filing through an example
Let’s say a startup company plans to issue stock to the public as part of a fundraising round. The company is required to file a blue sky registration with the relevant state securities regulators before offering the shares in that state. This filing includes necessary information about the company, the securities being offered, and any financial disclosures required by the state.
Once the filing is approved, the company can legally offer and sell securities to investors in that state. Without completing the blue sky filing, the company could face penalties, legal action, or be prohibited from conducting the offering within the state.
Example of blue sky filing clause
Here’s an example of how blue sky filing might be referenced in a securities offering document:
"The Company shall file the necessary blue sky registrations with the applicable state securities regulators in order to offer and sell the Securities in each state where required. The Company will make all required disclosures and filings, and will provide the necessary documents to the investors for compliance with state laws."
Conclusion
Blue sky filing is a crucial aspect of securities offerings that ensures compliance with state laws and protects investors from fraud. By requiring companies to disclose detailed information and obtain approval from state regulators before offering securities, blue sky laws help ensure that only legitimate investment opportunities are available to the public. Understanding and complying with blue sky filing requirements is essential for businesses looking to raise capital through securities offerings, and it provides investors with an added layer of protection.
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.