What are Blue Sky Laws?

In the United States, Blue Sky Laws are state laws which are designed to protect consumers from fraudulent deals with companies or firms which handle stocks, securities, and bonds. The first such law was enacted in Kansas in 1911, and other states quickly followed suit. These laws ensure that companies with publicly traded stock comply with some basic terms which allow investors to make informed decisions about their investments, rather than basing their decisions on advertisements which may not be strictly true.

The origin of the term is a bit obscure. Most people attribute it to a former Supreme Court Justice who wrote about companies selling stock which was not worth much more than a “patch of blue sky,” but unfortunately no one has been able to produce a court decision with this statement in it. Other suggest that these laws protect people from companies who claim “nothing but blue sky” in their future, suggesting that they are sound, safe, and secure investments.

Under Blue Sky Laws, a company which plans to offer public stock or a brokerage firm which wants to handle such stock must make filings with the state in which it is based. These filings include a disclosure of the company's financial standing, along with other data which might be relevant to investors. The state decides whether or not the company will be allowed to sell stock and securities, in addition to the Securities and Exchange Commission. This data is made public so that consumers can analyze it.

Unscrupulous deals are an unfortunate part of securities trading, especially for novice investors who are unsure of themselves. While states cannot individually babysit each investor, they can pass legislation like Blue Sky Laws to provide basic protection to people who want to get involved in securities, stocks, and mutual funds. In addition to governing companies who want to offer stocks, these laws are also used to control brokers, brokerage firms, and other representatives of the financial industry.

People in the United States can find individual Blue Sky Laws for their states in the State Code, along with other laws which might be of interest. It helps to be informed about prevailing laws, as consumers can use their knowledge of the law to spot fraudulent deals or activity. Someone who suspects violation of Blue Sky Laws by a company, broker, or firm should report these violations to the state so that the state's representatives can take action and protect other consumers.