In the early 1900s, decades before Congress passed federal securities laws, individual states passed laws regulating the sale of securities. The term “blue sky” arises from the characterization of baseless and broad-based speculative investment programs covered by such laws. In Hall v. Geiger Jones Co., 242 U.S. 539 (1917), the U.S. Supreme Court described the targeted activity as “speculative plans that have no more than so many feet of `blue sky.`” Blue sky laws developed in the years leading up to the Great Depression in response to ordinary investors losing money in highly speculative or fraudulent schemes that promise high returns, such as oil fields and exotic investments abroad. While anti-fraud regulations are most commonly enforced by the SEC and the various SROs, states also have the power and authority to take action against securities offenders under state law. Each state has its own securities law, colloquially known as the “Blue Sky Act”, which governs both the offering and sale of securities and the registration and reporting requirements for dealers and individual dealers who operate (directly and indirectly) in the state, as well as investment advisers who wish to offer their investment advisory services in the state. SLUSA does not prohibit state and local governments (and their pension funds) from suing for securities fraud. Therefore, state blue sky laws are valid and states are free to enact their own regulations governing the offering and sale of securities, as long as those regulations do not conflict with a federal law. The first Blue Sky Act was enacted in Kansas in 1911 at the instigation of its banking commissioner, Joseph Norman Dolley, and served as a model for similar laws in other states.

Between 1911 and 1933, 47 states adopted Blue Sky statutes (Nevada was the only resistant.[1] Today, the blue sky laws of 40 of the 50 states are based on the Uniform Securities Act of 1956. In the past, federal securities laws and state blue sky laws complemented and reinvented each other. Much of the overlap in work, particularly with respect to securities registration and the regulation of dealers and advisers, was largely anticipated by the Securities and Exchange Commission with the National Securities Markets Improvement Act of 1996 (NSMIA). However, this law has left some regulation of investment advisors and much of the fraud litigation under state jurisdiction. In 1998, the Securities Litigation Uniform Standards Act expressly prohibited state securities fraud claims from being brought in lawsuits that were in fact investor class actions, even if they were not filed as class actions. Even where blue sky laws apply today, states differ considerably in their method of regulation. New York, for example, does not require registration of securities, except for securities contained in real estate or domestic offerings under N.Y. GBL Article 23-A. California, on the other hand, requires issuers to pass a performance test to demonstrate that their securities are fair to investors under Title 4, Section 1 of the California Corporations Code. Individuals can sue the broker or issuer for withdrawal from the sale or for damages, depending on the state. For example, Florida`s blue sky law allows a person to sue only for resignation in most cases. Some state blue sky laws, such as New York`s Martin Law, do not give individuals the right to sue; Instead, only the state securities regulator can take legal action for violation of the law.

Blue sky laws generally require various forms of registration to prevent fraud. Most brokers, brokerage firms and issuers of securities must be registered with the government securities agency. Similarly, most securities sold in a state (unless exempt) must be registered. In addition, blue sky laws generally hold issuers or brokers liable for fraudulent misrepresentations or omissions in the sale of securities. The name given to the law refers to the evil it targets, that is, to use the language of a case cited, “speculative plans that have no more foundation than so many feet of `blue sky`”; Or, as the lawyer explained in another case, “stop the sale of shares in night flight operations, visionary oil wells, remote gold mines and other fraudulent operations.” Even if the descriptions are considered rhetorical, the existence of evil is implicit and a belief in its disadvantage; And we will stop no longer than to declare that the prevention of deception is the responsibility of the government and that the assessment of the consequences of this is not open to our consideration. Although there were blue sky laws in place during this period – Kansas enacted the earliest in 1911 – they tended to be weakly formulated and enforced, and unscrupulous people could easily avoid them by doing business in another state. After the stock market crash and the onset of the Great Depression, Congress enacted several securities laws to regulate the stock market and the financial sector at the federal level and create the SEC. Kansas Banking Commissioner Dolley, who railed against “Blue Sky merchants” when he lobbied for the passage of the Kansas Act in 1910, noted that some fraudulent investments were only aided by Kansas` blue skies. The Oxford English Dictionary has a cited use from 1906. The New York Times (and other national newspapers) also frequently reported on blue sky laws when various states began enacting them between 1911 and 1916. Newspapers explicitly used the term blue sky to describe laws. Fortunately, many types of securities and securities transactions are exempt from government securities registration requirements.

For example, many states provide transaction exemptions for private offerings under Regulation D, provided SEC 501-503 rules are fully complied with. The term Blue Sky Act arose out of concerns that fraudulent bids of securities were so brazen and mundane that issuers were selling building land in the blue sky. In general, blue sky laws predate the Securities Act of 1933 and the Securities Exchange Act of 1934 and were not provided for by these federal laws. In 1931, almost every U.S. state had laws regulating the sale of securities. The blue sky laws used in most U.S. states today are based on the Uniform Securities Act (USA) of 1956, which was written by federal lawmakers to serve as a model for states to create their own laws. Although most states have adopted some form of the United States, many have made variations in it, resulting in significant differences from state to state. U.S. legal interpretations can also vary widely from state to state.

Therefore, actions that may be considered fraudulent in one U.S. state cannot be considered fraudulent in another. In the mid-2000s, most state blue sky laws were modeled under the Uniform Securities Act of 1956. This Act required the registration of securities dealers and offerings and included prohibitions against illegal and fraudulent acts.