By Yoan Valiente, Founder & CEO · Updated · Part of the CRE investment glossary
Where blue sky laws come from
Every state has its own securities statute. The name “blue sky” is old and informal, and it stuck for state securities regulation generally. These laws typically do three things: require securities offerings to be registered or exempt, require firms and sellers to be registered or exempt, and give the state power to act on fraud.
For a sponsor, the practical question is not whether state law exists but how much of it still applies once a federal exemption is in hand.
Covered securities and federal preemption
Section 18 of the Securities Act, 15 U.S.C. 77r, defines covered securities, for which states may not require registration or qualification. Subsection (b)(4)(F) covers securities sold under Commission rules issued under Section 4(a)(2), which includes Rule 506 of Regulation D. That is why a Rule 506 offering does not register state by state.
The SEC’s Rule 506(c) page says the same thing in plain terms: the Securities Act preempts state registration and qualification, but states still have authority to require notice filings and collect state fees.
What states can still do
Preemption is narrower than “states stay out”. Section 18(c) preserves state authority in these areas:
- Antifraud authority: a state can investigate and prosecute fraud in connection with a securities transaction.
- Notice filings: a state can require a filing of the documents filed with the SEC, plus fees, solely for notice purposes. For a Rule 506 offering that is usually a copy of the Form D.
- Fees and timing are set state by state and change. This page does not list them; the state regulator’s website or your counsel does.
Blue sky filings in practice
A sponsor running a Rule 506 offering tracks where its investors live. A Form D goes to the SEC within 15 days after the first sale, and the state notice filings follow the investors’ states. Many states accept filings through the North American Securities Administrators Association’s electronic filing depository, but each state sets its own rules, so confirm with counsel.
Offerings that are not covered securities, such as Regulation A Tier 1 offerings, face state review as well. Tier 2 issuers are not required to register or qualify with state regulators.
What to track
A simple blue sky checklist for a Rule 506 raise:
- Each investor’s state of residence at the time of sale.
- The date of first sale in each state, since filing clocks run from it.
- The Form D and the state notice documents you filed, and the fees you paid.
- Any state-specific questions to take to securities counsel. This page is general information, not legal advice. Ask securities counsel before you rely on an exemption.
Primary sources
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.