Understanding Blue Sky Laws: Definition and Regulations

Key Takeaways

• Blue Sky laws, which vary among states, aim to have in place certain regulations in the offering and selling of stocks and bonds. They also seek to protect investors against fraudulent security trade.  

• Basically following guidelines similar to those issued by the U.S. Securities and Exchange Commission, the law also permits the hiring of security regulators for every state, who ensure that the state follows Blue Sky law guidelines.

• The laws require all stock-issuing companies to reveal and provide documents regarding the offering’s financial details, as well as register the offering.

While investing can be lucrative, the practice inherently carries risks. Thus, the last thing an investor needs to worry about is security fraud. That is where Blue Sky laws, which protect investors, and more, come in. But just what are these laws? The following explains them and how they relate to alternative investments.  

What are Blue Sky Laws

Blue Sky laws, which vary among states, target companies, and seek to regulate the offering and selling of stocks and bonds. In other words, they require companies to make full disclosure of their sales and offers. They also seek to protect investors against fraudulent security trade.  

Basically following guidelines similar to those issued by the U.S. Securities and Exchange Commission, the law also permits the hiring of a security regulator for each state who ensures state compliance with Blue Sky law guidelines.

506b Funds vs 506c Funds

In a Rule 506(b) offering, unless the issuer has reason to believe the investor is not telling the truth, they may go on the investor’s word that they are an accredited investor. That is contrary to 506(c) fund offerings, in which the issuer must act reasonably to verify investors’ accredited status.

The History of Blue Sky

40 states have adopted the laws made possible by the Uniform Securities Act of 1956. The laws have been in existence in the early 1900 and became widely popular after a Kansas Supreme Court justice proclaimed a wish to protect investors from speculative ventures that have no more basis than so many feet of “blue sky.”

How are Blue Sky Laws Regulated?

States have adopted the SEC pattern and rely on the government entity to enforce them. Such similarity notwithstanding, each state may interpret SEC rules differently. Every state has its own regulatory agency that usually is the Securities Commissioner that enforces its Blue-Sky laws.

Who Regulates Blue Sky Laws?

Each state that has a Blue-Sky law regulates it. The SEC generally regulates and enforces Blue Sky laws, but every state has its own regulator for enforcement. The regulator also keeps an eye on investment advisors who manage stocks and bonds for under $25 million.

What Do Blue Sky Laws Regulate?

The laws require all stock-issuing companies to reveal and provide documents regarding the offering’s financial details, as well as register the offering. This allows investors to make informed investment decisions.

Blue Sky laws also permit legal action against fraudulent activity should there be complaints. Such activity can include, for example, excessive offer prices or fake issuances.

Some states permit law involvement in the issuing of licenses to brokers, brokerage firms, and investment advisors.

What is Regulation D & Form D?

Under Regulation D, which governs the private placements of securities, Form D is required. It includes fundamental company information for investors. Private placement refers to venture capital raising that involves the sale of securities to a comparatively small number of select investors.

What Happens if You Violate Blue Sky Laws?

The laws establish a penalty for security issuers, permitting authorities to act against them due to failure of compliance with law provisions. Under such laws, a company that fails to pass an assessment of merit, its security cannot be issued in the market.

What are Risks Associated with Investing in Venture Capital?

One of the primary risks of venture capital, which relates to Regulation D and Form D above, is not securing the investment, meaning the startup will not be able to raise the money from investors it requires. The other major risk is the inability to repay the investment.

How are Investments Vetted?

In investing, it is crucial to have as much information about where one’s placing their capital as possible, and as time allows.

When performing due diligence, investors in public markets can, for example, search news sources for stories (especially negative ones) about the underlying company of a stock. They can also check public records for bankruptcy filings, lawsuits, criminal proceedings, past company performance, and more. Financial news sites can be searched for financial numbers involving the company.

Due diligence is also recommended for alternative investments, which are increasingly popular as a way to reduce portfolio volatility, since assets such as art and real estate are not directly tied to the stock market. Alternatives can also protect against market downturns and potentially improve returns. 

Investors in such assets should have a grasp of how an investment’s underlying assets might produce cash flows or drive later value. They should also consider scenarios in which one’s assets could increase or decrease in value, as well as similarities or differences compared to the remainder of the portfolio.

While no investment is risk free, Yieldstreet’s broad selection of alternative assets are already highly vetted, relieving investors of much of the need for due diligence. The leading platform, on which nearly $4 billion has been invested, has a vetting process that includes screening every opportunity and potential partner.

Yieldstreet then gets into due diligence, using a structured, exacting, and comprehensive approach that results in an assessment based on a number of factors including track record, management team experience, integrity, infrastructure, and overall strategy, and more.

The opportunity is subsequently forwarded to Yieldstreet’s investment team, which evaluates deal components, including an investment thesis comprised of market trends, insurance policies, appraisals, and more. Then the investment goes to committee review to help identify potential risks. Ultimately, once the opportunity makes it to the platform, investors will make their own decisions, 

Yieldstreet’s offerings also serve another essential investor purpose – diversification. Constructing a portfolio of varying asset types with different degrees of risk can go a long way toward lessening overall portfolio risk, which is foundational to long-term investing success.

Portfolio Diversification and Alternative Investments

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. 

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

Blue Sky laws seek to protect the investor in the buying and selling of securities. Such safeguards permit investors to make wiser, more-informed investment decisions.

Remember that while the laws apply to securities, alternative investments should also be vetted, and at least one investment platform has such a process in place.