Blue sky laws are state laws and regulations that are meant to protect potential investors from investing in securities--like bonds and stocks--that may be highly risky or even fraudulent. These blue sky laws have a colorful history dating back more than a century and today they are an important element in helping states crack down on securities fraud and prevent the public from falling victim to highly speculative and misleading investments. Here's just a quick look at some of the more interesting historical trivia behind blue sky laws.
What's in a name?
While the origins of the term "blue sky law" are somewhat shrouded in mystery, U.S. Supreme Court Justice Joseph McKenna is often credited with popularizing the term. In a 1917 ruling he pointed out that such laws are meant to be used against investment schemes that offer only "so many feet of blue sky." In other words, such investments were largely considered worthless or, at least, highly speculative.
Kansas passed the first blue sky law
Kansas paved the way for many other states when it passed the first blue sky law in 1911. Other states, such as Michigan, Ohio and South Dakota soon followed Kansas' lead and passed their own blue sky laws. Ironically, it was in the states where there were relatively few securities interests groups that blue sky laws had the easiest time getting passed. In states where investment bankers had more political clout, such as in New York, blue sky laws had a much harder time getting passed.
Blue sky laws vs. Federal law
Blue sky laws made up the bulk of securities regulation in the United States prior to 1933, when Congress finally passed federal securities regulations. Prior to 1933, securities regulations largely consisted of a patchwork of state laws. The introduction of federal law, however, in many ways only made matters worse, with federal and state regulations often overlapping in ways that proved a headache for regulators to deal with.
Uniformity of blue sky laws
The patchwork nature of blue sky laws posed a significant problem that was at least partially addressed by the federal Uniform Securities Act of 1956. This piece of federal legislation was then used by a majority of states when crafting their own securities regulation, which in turn led to far greater uniformity across the country. While discrepancies between state laws still exist, current blue sky laws tend to make it much easier for investors to verify whether a potential investment is trustworthy.
Blue sky laws are a bit of a funny name for what is actually a very serious issue. By ensuring that investors do not fall prey to financial fraudsters promising everything "but the blue sky," such laws also ensure that the selling of securities can be done in an open and fair manner.