Blue sky laws are sets of state regulations enacted to guard investors against securities fraud. There is also federal blue sky legislation under the umbrella of the Uniform Securities Act, which forms the blueprint for many state regulatory schemes. These laws govern practices surrounding the buying and selling of securities. If your business involves the purchase or sale of securities, you should be familiar with the blue sky laws in your state as well as with applicable federal statutes. With increased vigilance and enforcement concerning securities fraud, business owners must make sure their practices are in full compliance with the law.
State and Federal Laws
The federal Securities and Exchange Commission (SEC) regulates and investigates securities violations in cases that do not fall under the purview of state agencies or cases where the state chooses to rely on the SEC to investigate and prosecute. In addition, each of the 50 states has its own securities commission.
Securities regulations can differ from state to state, but the underlying principles are the same. The goal of blue sky laws is to protect investors from being defrauded through misrepresentations about their securities transactions. Thus, each law will have provisions requiring the disclosure of material facts concerning a securities offering.
In addition to requiring the provision of facts necessary to making an informed decision, the law may also enforce merit reviews to ensure the offering is fair to investors. When a business fails to pass a merit review, it is prevented from offering or selling its securities within that state. Institutional sales, on the other hand, may still be made to in-state banks and investment companies.
To avoid falling afoul of securities provisions, it is important to know what types of issues tend to trip up companies. Many issues with compliance stem from issues that lower the value of the securities in a way that is not necessarily apparent to an outsider. This includes negative worth, low capital, failure to earn and dilution of stocks. Other issues result from practices that often skirt the line of legality and may create the appearance of improper transactions. This includes loans to employees and company officers, tiered voting rights, exorbitantly high offering expenses and a large number of outstanding warrants and options.
If your company is suspected of securities violations, you may be audited by your state agency or by the SEC. Audits can be triggered by suspicious activity, a whistleblowing employee or a client complaint. In addition to allowing for government enforcement, blue sky laws also allow private investors who claim to be damaged by the illegal activity to file private suits.
In addition, state and federal laws require stock brokers and investment companies to be registered. Securities transaction must also be properly registered and recorded. While there are some exemptions based on the size of the transaction or other factors, these exemptions vary from state to state. If you believe a proposed transaction may be exempt from normal registration procedures, you should consult a securities law professional before going forward.
Importance of Compliance
Blue sky laws can be complex and require a lot of paperwork and specialized protocols. While compliance may at times seem burdensome, the consequences of violation can be disastrous, especially for a small company. It is a good idea to involve a securities law attorney in helping you structure an effective compliance program for your company, which will establish procedures for minimizing, detecting and correcting any violations. A good compliance program will also provide training for all employees that will enable them to understand their roles in ensuring your company remains compliant.
Small company leaders should familiarize themselves with relevant blue sky laws. Acting proactively to avoid potential violations is sure to go a long way in protecting your business from investigations and audits.
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