Blue sky law
Encyclopedia
A blue sky law is a state
law in the United States
that regulates the offering and sale of securities
to protect the public from fraud
. Though the specific provisions of these laws vary among states, they all require the registration of all securities offerings and sales, as well as of stock broker
s and brokerage firms. Each state's blue sky law is administered by its appropriate regulatory agency, and most also provide private causes of action
for private investors who have been injured by securities fraud
.
The first blue sky law was enacted in Kansas
in 1911 at the urging of its banking commissioner, Joseph Norman Dolley
, and served as a model for similar statutes in other states. Between 1911 and 1933, 47 states adopted blue-sky statutes (Nevada was the lone holdout). Today, the blue sky laws of 40 of the 50 states are patterned after the Uniform Securities Act
of 1956. Historically, the federal securities laws and the state blue sky laws complemented and often duplicated one another. Much of the duplication, especially with regards to registration of securities and the regulation of brokers and advisors, was largely preempted by the Securities and Exchange Commission with the National Securities Markets Improvement Act of 1996 (NSMIA). This act, however, left some regulation of investment advisors and much of the fraud litigation under state jurisdiction. In 1998, state law securities fraud claims were expressly preempted
by the Securities Litigation Uniform Standards Act
from being raised in lawsuits that were effectively class action
s by investors, even if not filed as class actions.
in Hall v. Geiger-Jones Co.
, 242 U.S. 539 (1917), a case that addressed the constitutionality of state securities laws. Oddly, McKenna is frequently (and erroneously) given credit for inventing the term, even though J. N. Dolley used the term when pushing for passage of the Kansas statute in 1910, and McKenna's own opinion in Hall itself attributes the term to an unnamed, earlier source:
Kansas banking commissioner Dolley, railing against "blue sky merchants" when pushing for passage of the Kansas statute in 1910, observed that certain fraudulent investments were backed by nothing but the blue skies of Kansas. The Oxford English Dictionary
has a cited use dating to 1906. Also, The New York Times
(and other national newspapers) frequently reported on the blue sky laws as various states began to enact them between 1911 and 1916. The newspapers expressly used the term blue sky to describe the laws.
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...
law in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
that regulates the offering and sale of securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
to protect the public from fraud
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
. Though the specific provisions of these laws vary among states, they all require the registration of all securities offerings and sales, as well as of stock broker
Stock broker
A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
s and brokerage firms. Each state's blue sky law is administered by its appropriate regulatory agency, and most also provide private causes of action
Cause of action
In the law, a cause of action is a set of facts sufficient to justify a right to sue to obtain money, property, or the enforcement of a right against another party. The term also refers to the legal theory upon which a plaintiff brings suit...
for private investors who have been injured by securities fraud
Securities fraud
Securities fraud, also known as stock fraud and investment fraud, is a practice that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws....
.
The first blue sky law was enacted in Kansas
Kansas
Kansas is a US state located in the Midwestern United States. It is named after the Kansas River which flows through it, which in turn was named after the Kansa Native American tribe, which inhabited the area. The tribe's name is often said to mean "people of the wind" or "people of the south...
in 1911 at the urging of its banking commissioner, Joseph Norman Dolley
Joseph Norman Dolley
Joseph Norman Dolley was the bank commissioner of State of Kansas who pushed for the passage of the first state securities laws, known as the blue-sky laws. J.N. Dolley, as he was known, was born in Boston, Massachusetts on April 14, 1860, a son of Joseph Norman and Ellen Dolley. On Oct. 13,...
, and served as a model for similar statutes in other states. Between 1911 and 1933, 47 states adopted blue-sky statutes (Nevada was the lone holdout). Today, the blue sky laws of 40 of the 50 states are patterned after the Uniform Securities Act
Uniform Securities Act
The Uniform Securities Act is a model statute designed to guide each state in drafting its state securities law. It was created by the National Conference of Commissioners on Uniform State Laws ....
of 1956. Historically, the federal securities laws and the state blue sky laws complemented and often duplicated one another. Much of the duplication, especially with regards to registration of securities and the regulation of brokers and advisors, was largely preempted by the Securities and Exchange Commission with the National Securities Markets Improvement Act of 1996 (NSMIA). This act, however, left some regulation of investment advisors and much of the fraud litigation under state jurisdiction. In 1998, state law securities fraud claims were expressly preempted
Federal preemption
Federal preemption refers to the invalidation of US state law when it conflicts with Federal law.-Constitutional basis:According to the Supremacy Clause of the United States Constitution,...
by the Securities Litigation Uniform Standards Act
Securities Litigation Uniform Standards Act
The Securities Litigation Uniform Standards Act of 1998 is a federal legislative act in the United States regarding private class action lawsuits for securities fraud...
from being raised in lawsuits that were effectively class action
Class action
In law, a class action, a class suit, or a representative action is a form of lawsuit in which a large group of people collectively bring a claim to court and/or in which a class of defendants is being sued...
s by investors, even if not filed as class actions.
Origin of the term Blue Sky in a securities context
Its earliest cited use by the United States Supreme Court was in an opinion by U.S. Supreme Court Justice Joseph McKennaJoseph McKenna
Joseph McKenna was an American politician who served in all three branches of the U.S. federal government, as a member of the U.S. House of Representatives, as U.S. Attorney General and as an Associate Justice of the Supreme Court...
in Hall v. Geiger-Jones Co.
Hall v. Geiger-Jones Co.
Hall v. Geiger-Jones Co., , is a United States Supreme Court case in which the Court upheld individual states' power to regulate the offer, sale, and purchase of securities. Such regulatory laws are commonly known today as "blue-sky laws" based upon words in this court opinion...
, 242 U.S. 539 (1917), a case that addressed the constitutionality of state securities laws. Oddly, McKenna is frequently (and erroneously) given credit for inventing the term, even though J. N. Dolley used the term when pushing for passage of the Kansas statute in 1910, and McKenna's own opinion in Hall itself attributes the term to an unnamed, earlier source:
Kansas banking commissioner Dolley, railing against "blue sky merchants" when pushing for passage of the Kansas statute in 1910, observed that certain fraudulent investments were backed by nothing but the blue skies of Kansas. The Oxford English Dictionary
Oxford English Dictionary
The Oxford English Dictionary , published by the Oxford University Press, is the self-styled premier dictionary of the English language. Two fully bound print editions of the OED have been published under its current name, in 1928 and 1989. The first edition was published in twelve volumes , and...
has a cited use dating to 1906. Also, The New York Times
The New York Times
The New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...
(and other national newspapers) frequently reported on the blue sky laws as various states began to enact them between 1911 and 1916. The newspapers expressly used the term blue sky to describe the laws.
See also
- Securities regulation in the United StatesSecurities regulation in the United StatesSecurities regulation in the United States is the field of U.S. law that covers various aspects of transactions and other dealings with securities...
- National Instrument 43-101National Instrument 43-101National Instrument 43-101 is a mineral resource classification scheme used for the public disclosure of information relating to mineral properties in Canada...
, Canadian standards of disclosure for mineral properties, intended to help protect investors from fraudulent representation.