Blue sky: Overview, definition, and example
What is blue sky?
"Blue sky" refers to laws and regulations that govern the offering and sale of securities to protect investors from fraud. The term is most commonly associated with "blue sky laws," which are state-level regulations in the United States designed to prevent securities fraud and ensure that investors are provided with adequate information before making investment decisions. These laws require businesses to register their securities with the state before offering them to the public, ensuring that only legitimate, sound investments are available for purchase.
The term "blue sky" is believed to come from the idea of protecting investors from fraudulent schemes that are as unrealistic as selling the sky.
Why is blue sky important?
Blue sky laws are important because they provide a layer of protection for investors by ensuring that companies offering securities are properly vetted and that the offerings are transparent. These laws help maintain the integrity of the financial markets, protect investors from fraud and deceit, and promote confidence in the securities markets. For businesses, complying with blue sky regulations is necessary to legally offer securities to investors in specific states, and it can help avoid costly legal issues or penalties for non-compliance.
Understanding blue sky through an example
Let’s say a startup company wants to raise capital by selling shares of stock to the public. Before they can do so, they must comply with blue sky laws in the states where they plan to offer these shares. The company would need to file the necessary paperwork with the state securities regulator, providing information about the company, the offering, and its financial health. This process ensures that investors have access to reliable information and can make informed decisions about whether or not to invest.
In another example, a company planning a nationwide public offering might have to comply with blue sky laws in multiple states. Each state may have different requirements for registration and disclosure, so the company must ensure it meets all these regulations before proceeding with the offering to avoid legal consequences.
An example of a blue sky clause
Here’s how a blue sky clause might appear in an investment agreement or securities offering document:
“The Company agrees to comply with all applicable blue sky laws in each state where it offers securities. The Company shall file all necessary documents with the appropriate state securities regulators and provide all required disclosures to potential investors as mandated by state law.”
Conclusion
Blue sky laws are a critical component of the regulatory framework that protects investors from securities fraud. By requiring companies to disclose essential information and register their securities offerings with state regulators, these laws promote transparency and fairness in the financial markets. Understanding and complying with blue sky regulations is essential for businesses looking to raise capital and for investors seeking to make informed decisions based on trustworthy offerings.
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.