Blue Sky Law

An American law term that refers to government controls, through statutes, of the sale of securities to the public.

State securities laws, commonly known as Blue Sky Laws after the word was used by a Supreme Court justice (McKenna) in 1917, Hall v. Geiger-Jones Co., 242 U.S. 539 (published at vlex.com/vid/20032865) in which he stated:

"(T)he law is a regulation of business, constrains conduct only to that end, the purpose being to protect the public against the imposition of unsubstantial schemes and the securities based upon them. Whatever prohibition there is, is a means to the same purpose, made necessary, it may be supposed, by the persistence of evil and its insidious forms and the experience of the inadequacy of penalties or other repressive measures.

"The name that is given to the law indicates the evil at which it is aimed, that is, to use the language of a cited case, 'speculative schemes which have no more basis than so many feet of blue sky; or, as stated by counsel in another case, 'to stop the sale of stock in fly-by-night concerns, visionary oil wells, distant gold mines and other like fraudulent exploitations.'

"Even if the descriptions be regarded as rhetorical, the existence of evil is indicated, and a belief of its detriment; and we shall not pause to do more than state that the prevention of deception is within the competency of government and that the appreciation of the consequences of it is not open for our review."

The US Securities and Exchange Commission (at sec.gov) adds that Blue Sky laws:

"... are designed to protect investors against fraudulent sales practices and activities. While these laws can vary from state to state, most states laws typically require companies making small offerings to register their offerings before they can be sold in a particular state. The laws also license brokerage firms, their brokers, and investment adviser representatives."