Running a Venture Capital Fund

What Are Blue Sky Laws?

Blue sky laws protect investors against securities fraud. Most venture fund offerings are exempt from blue sky law registration requirements, but fund managers often need to make notice filings with the state.
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  • Blue sky laws are state-level regulations intended to protect investors against securities fraud  by requiring certain securities issuers (e.g., funds) to register and disclose the specifics of the security offering.
  • The National Securities Markets Improvement Act of 1996 created a class of “covered securities” which are exempt from state blue sky law registration requirements.
  • Most venture fund offerings are likely to qualify for such blue sky law exemptions—however, they often still need to make notice filings to the state.

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Blue sky laws are state-level regulations designed to protect investors against securities fraud. While they can differ from state to state, blue sky laws require registration and disclosure of the specifics of the securities offering and prohibit issuers of securities from making any false or misleading statements (or omitting material facts) pertaining to said offerings. They also make these issuers liable for such fraudulent statements. 

While blue sky laws also require issuers who want to issue securities to residents of a particular state to register under said state’s blue sky laws, thanks to federal preemption, most venture fund offerings will be exempt from such state registration requirements. Despite this exemption, they will still need to make a blue sky notice filing.

In this guide, we’ll go over the basics of blue sky laws and examine why venture fund offerings are generally exempt from their registration requirements. We’ll also list out some general steps to consider when making a blue sky filing.

What’s the Purpose of Blue Sky Laws?

Blue sky laws exist to protect investors. Up until the passage of the Securities Act of 1933, there was minimal federal regulation of securities offerings and investment opportunities. This left it up to the states to enact their own state-level regulations.

The key provisions within all state blue sky laws relate to registration requirements and prohibitions against fraudulent activities and misrepresentation. For example, here’s how the latter provision looks in the Uniform Securities Act of 1956 (a model statute on which about 40 states base their blue sky laws):

It is unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly (1) to employ any device, scheme, or artifice to defraud, (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or (3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

Although the first blue sky law was enacted in 1911, a federal law passed in 1996 placed most securities regulation in the hands of the federal government. This is why most venture fund offerings are exempt from needing to register under the various state blue sky laws and are instead subject to federal regulation and oversight.

Blue Sky Laws and Venture Capital

In 1996, Congress passed the National Securities Markets Improvement Act. This act amended the Securities Act of 1933, adding a new class of securities—called “covered securities”—which are no longer subject to state securities law registration requirements. This is federal preemption, as the federal requirements take precedence over any state level requirements.

Covered securities include securities listed on national stock exchanges and securities sold in accordance with Rule 506 of Regulation D under the Securities Act of 1933. As a quick refresher:

  • Rule 506(b) under Regulation D permits private offerings to accredited investors. No general solicitation or advertising is allowed. In this case, funds or companies can rely on investors’ self-certification as to their accredited status.
  • Rule 506(c) under Regulation D permits private offerings to accredited investors. General solicitation and advertising are allowed. However, funds or companies must take reasonable steps to verify investors’ accredited statuses. This was a subsection added in the JOBS Act.

This federal preemption of blue sky laws has made capital markets more efficient. If a company wants to issue covered securities in 50 states, it no longer needs to undergo 50 different state registration processes. This saves time and lowers offering costs, which can be passed down to investors.

Currently, most venture fund offerings are conducted under Rule 506 of Regulation D. This means essentially all venture fund offerings are exempt from state blue sky laws’ registration requirements. They’re also exempt from SEC registration requirements as Rule 506 offerings are exempt from registration at the federal level. This differs from publicly listed securities, which are exempt from state blue sky laws’ registration requirements but are subject to registration requirements with the SEC.

However, venture fund offerings’ exemption from registration requirements under state blue sky laws should not be confused with a total blue sky law exemption. Should fraudulent activities be suspected, the states still have the right to investigate and carry out enforcement actions.

Also note that Regulation D registration-exempt issuers must still make a notice filing to the SEC and any states they plan to offer securities in. This is known as a blue sky filing.

Blue Sky Laws: Required Filings For VCs

To comply with blue sky laws, venture fund managers must do the following:

  1. File Form D with the SEC. This exempts the issuer from both SEC and state blue sky laws’ registration requirements. Note there are two types of filing venture fund managers can choose from—pre-filing and post-close filing. In the former, they can file before the fund closes. In the latter, fund managers have 15 days to file the Form D after closing the fund. The difference between the two is that for pre-filing, fund managers don’t have to disclose the actual offering amounts that have been raised, which can help the optics of the fund.
  2. Make a state blue sky notice filing. Not all states will require this—different states may have various exemptions that could preclude an issuer from needing to even do this notice filing. For instance, some states may offer exemptions based on whether general solicitation is allowed or if the number of investors in the state falls below a certain threshold. Timing-wise, the state blue sky filing can be done either before the fund closes or within 15 days of the fund closing (similar to Form D). Failure to make the necessary blue sky filings can result in financial penalties and, as the SEC notes, “may cause state securities regulators to suspend the offer or sale of securities within their jurisdiction."

Blue Sky Filing Fees

The cost to make blue sky notice filings depends on the geographic makeup of your LPs. Historically on AngelList, we've seen a median total cost of $1.2k, with a maximum cost of around $6k. Here's a state-by-state breakdown of blue sky filing fees. Note the filing fee for each state is charged if any LP from that state invests in the fund.

Pricing data as of June 2022

AngelList Helps With Blue Sky Laws Compliance

Blue sky and Form D filings can be complex, which is why many fund managers hire outside legal counsel to help them. At AngelList, our internal compliance teams manage blue sky and Form D filings for all our fund managers, saving an added legal burden. 

Authors
Ian Lee
Financial Writer
Kate Bridge
Legal Counsel, AngelList Venture
Micah Sucherman
LP Relations, AngelList Venture
Colt Sauers
GP Relations, AngelList Venture
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