An introduction to Blue Sky filings

Many people may have heard the phrase, blue sky laws; however, not many may know the significance of these laws and the requirements that entrepreneurs must meet to maintain compliance with state and federal regulators. This post details the history of blue sky laws, major differences between blue sky laws in various states, which forms to file and cost of maintaining compliance with blue sky laws. 

What are blue sky laws and why do they exist?

Blue sky laws are state laws that are created to protect investors against securities fraud. These laws can vary from state to state and are classified as anti-fraud regulations. In 1956 the Uniform Securities Act was passed, and stands as a framework to guide state agencies in creating their securities legislation. A commonality among states is that blue sky laws typically require sellers of new issues to register their offering, and provide financial details of the deal and entities involved in the transaction.

The term “blue sky” is derived from the U.S. Supreme Court case Hall vs. Geiger Jones Co., 242 U.S. 539 (1917), where speculative schemes have no basis other than “a few feet of blue sky”. In other words, these laws were created to protect investors against pie in the sky ventures that have no reason to be successful other than by hope or luck.

It wasn’t until after the Great Depression that congress got involved in protecting investors by enacting the Securities Act of 1933. Since then, blue sky laws and the Securities Act of 1933 have worked together to help protect investors from extremely speculative investments. In the case where there is a conflict between the two laws, judicial law dictates that the court use the law that offers more protection to the investor. For example, if the blue sky law in a given state doesn’t require specific documentation; however, the Securities Act of 1933 does require that document, then the seller (issuer/company) will have to provide that document.

Note that sellers are exempt from blue sky laws if the securities are listed on a national stock exchange or fall under rule 506 of regulation D of the Securities Act of 1933.

What are major state differences among blue sky laws?

There are three major differences that vary amongst the states: fees, exemptions, and specific filing requirements. Each state assesses various fees for blue sky filings, has different exemptions and may require slightly different information.

It is imperative to consult with legal counsel about blue sky laws when raising equity because each state has its own set of laws and is governed by a different agency.

A few quick highlights for the state of Texas are below:

• The Texas State Securities Board (TSSB) is the regulatory authority in Texas responsible for administering and enforcing the state’s securities laws.

• The TSSB is responsible for administering and enforcing the Texas Securities Board.

• The Texas Securities Act requires securities to be registered with the TSSB unless an exemption is available. This includes the registration of both securities and individuals or firms involved in selling or offering securities.

• Common exemptions include transactions with accredited investors, private placements, and securities issued by government entities.

• Disclosure requirements: issuers of securities are generally required to provide investors with comprehensive and accurate information about the securities being offered. This includes the risks associated with the investment.

In Texas, an amendment to any SEC filing must be accompanied by an amendment filed with TSSB, similar to initial filings.

What states do I need to file in?

Typically, entrepreneurs need to complete blue sky filings in any state where they are selling securities. If an entrepreneur is raising capital for a business acquired through a self-funded search, then he or she likely needs to file in the state where the business is based as well as each state where investors are located.

For instance, let's assume a self-funded searcher has a business under contract in Wyoming. She has filed a Delaware LLC to be her acquisition entity in an asset sale and is registering it to do business in Wyoming. To help her fund the equity needed for the acquisition, she is in talks with investors located in New York and Florida.

Assuming that she ends up securing funding from investors in both states, she will likely need to complete blue sky filings in Wyoming, New York, and Florida.

When do I need to be in compliance with blue sky filings?

An issuer of securities typically needs to be in compliance with blue sky laws by the time of the sale or offering. For example, in the state of Texas, the deadline for blue sky law filing is within the first 15 days after the first sale of securities in the state.

The primary form that must be filed is Form D (through the SEC) and a notice must be filed with the state. Again, forms that need to be filed are highly dependent on the state, industry, business operations and nature of the offering. 

Irrespective of a company’s exemption status (two exemptions are 506b and 506c), Form D must be filed and its applicable amendments to maintain compliance with state and federal regulators.

How would an entrepreneur file Form D and pay for the filing?

A common way to fill out Form D in the state of Texas, and in most states, is through the North American Securities Administrators Association (NASAA). NASAA is an Electronic Filing Depository (EFD) that acts as a one stop shop for filing and paying for Form D.

To keep with our earlier example, the filing fee in Texas for Form D is equal to one-tenth of one percent of the aggregate amount of federal covered securities described as being offered for the sale worldwide (up to a maximum fee of $500).

Note that there are amendments and other filings that a business or issuer might have to file; however, these amendments and fillings are state dependent. The fee schedule details the registration, filing notice, etc. and their respective fees.

It is imperative that an entrepreneur consult his or her counsel or advisors to make sure that all appropriate documents are filed and fees are paid on time.

How does an entrepreneur manage these regulatory requirements?

Entrepreneurs typically have three ways to handle complying with regulatory requirements.

1. Do-it-yourself: This involves understanding and complying with security regulations on your own. While this is likely the cheapest option, it opens entrepreneurs up to risk if they do not know exactly what they are doing.

2. Outside counsel: For entrepreneurs working with a securities attorney, they can often rely on their counsel to assist with filings for SEC and Blue Sky compliance.

3. Equity platforms: Platforms like Mainshares and compliance firms like Colonial Stock Transfer include blue sky compliance services in their main offerings. This offers more affordable pricing than working with a securities attorney while affording an entrepreneur more protection than going at it alone.

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.