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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.
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.
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:
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.
To comply with blue sky laws, venture fund managers must do the following:
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. For more information on state-specific blue sky filing fees, see the North American Securities Administrators Association - Electronic Filing Depository "Form D Fee Schedule."
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.
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