Federal securities law is only half of every offering. Each state has its own securities law, known as its blue sky law, and an offering has to satisfy the state where each investor lives. Florida's version, for example, is Chapter 517 of the Florida Statutes.
The name is said to come from the early 1900s, when states began passing these laws to stop promoters from selling investments with "no more basis than so many feet of blue sky." The purpose has not changed.
I spent sixteen years at the SEC, and much of that work overlapped with state regulators. Here is how the state layer works today.
What the States Can and Cannot Do
In 1996, Congress passed the National Securities Markets Improvement Act, known as NSMIA. It created a category called covered securities in Section 18 of the Securities Act. States cannot require registration or review of covered securities. They can still:
- ›Require a notice filing and collect a fee
- ›Bring anti-fraud actions
Covered securities include, among others:
- ›Securities listed on a national securities exchange, such as Nasdaq or the NYSE
- ›Securities sold under Rule 506(b) or 506(c) of Regulation D
- ›Securities sold in a Regulation A Tier 2 offering
- ›Securities sold under Regulation Crowdfunding
Rule 506 Offerings: Notice Filings
For a Rule 506 offering, most states require a notice filing for sales to their residents. A typical filing is a copy of the federal Form D, a consent to service of process, and a fee. Most states accept these through NASAA's Electronic Filing Depository. Deadlines are commonly 15 days after the first sale in the state, but timing and fees vary, and a few states have their own requirements.
The work is in the tracking. Every time you accept an investor from a new state, you may have a new filing. I explain the federal side in Form D Filing: The 15-Day Deadline.
Offerings That Are Not Covered
Some exemptions do not get federal preemption. For these, each state where you sell may require registration or a state exemption:
- ›Rule 504 offerings
- ›Regulation A Tier 1 offerings (NASAA runs a coordinated review program for these)
- ›Private placements under Section 4(a)(2) that do not use Rule 506
- ›Intrastate offerings, which are built around a single state's law
State exemptions differ from state to state. Some limit the number of purchasers, some require that only accredited investors buy, and some require a filing before the first sale. This is where small offerings get into trouble: the federal exemption is fine, but the company sold to residents of a state whose rules it never checked.
The Resale Question Companies Forget
Blue sky laws also govern resales. When shareholders of a company that is not listed on a national exchange resell their shares, those trades need a state exemption too. Common routes include exemptions for companies that file reports with the SEC, and the so-called manual exemption, available in many states, for companies whose information is published in a recognized securities manual. Some states also recognize certain OTC Markets tiers.
For a company planning to trade on the OTC Markets, secondary-trading coverage affects whether brokers in a given state will handle the stock. It belongs on the going-public checklist, not after it.
What Goes Wrong
The state problems I saw most often:
- ›Missed notice filings for Rule 506 offerings, leading to late fees and, in some states, enforcement action
- ›Rule 504 or 4(a)(2) offerings sold without checking each state's rules
- ›Unlicensed finders paid by the company, which can violate state broker-dealer laws even when the offering itself is exempt
- ›No resale plan for shareholders of a newly public OTC company
State regulators are often the first to hear from an unhappy investor. They also share information with the SEC.
A Practical Approach
- ›Decide on the federal exemption first; it determines how much state work follows.
- ›Track each investor's state of residence as you sell.
- ›Calendar notice filings by state, not by offering.
- ›For non-covered offerings, confirm the state exemption before you sell in that state.
- ›If you plan to go public, map secondary-trading coverage early.
Chapter 5 of my book covers finders, Form D and blue sky filings: Finders, Form D and Blue Sky.
Related Reading
- ›Reg D Attorney — Flat Fee
- ›Rule 506 of Regulation D: 506(b) vs. 506(c)
- ›Reg A vs. Reg D: Which Exemption Fits Your Raise?
Questions about how this applies to your company? Email me directly at flehrer@securitiesattorney1.com or call (561) 706-7646.
This post is general information, not legal advice.
Authoritative Sources
- 17 C.F.R. §§ 230.500–230.508 — Regulation D — Electronic Code of Federal Regulations
- SEC Investor Bulletin: Accredited Investor Definition — U.S. Securities and Exchange Commission
- 17 C.F.R. Part 240 — General Rules and Regulations, Exchange Act — Electronic Code of Federal Regulations
- SEC EDGAR — Full-Text Search of Company Filings — U.S. Securities and Exchange Commission
- Securities Act of 1933 (15 U.S.C. §§ 77a et seq.) — U.S. Government Publishing Office
- Securities Exchange Act of 1934 (15 U.S.C. §§ 78a et seq.) — U.S. Government Publishing Office
Primary sources are cited so readers can verify the law directly. Rules and staff guidance change; see our editorial and corrections policy to report an error or an outdated citation.
Frederick M. Lehrer served as an enforcement attorney in the SEC's Division of Enforcement at the Southeast Regional Office from 1991 through 2000, and concurrently as a Special Assistant United States Attorney in the Southern District of Florida from 1997 through 1999, prosecuting securities-related financial crimes. He has practiced securities and corporate law in private practice for more than twenty-five years, advising issuers worldwide on SEC registration, disclosure obligations, Regulation D private placements, Regulation A offerings, and going public transactions. The firm is based in Florida and serves clients internationally.
Questions about how this applies to your company are answered personally — most within the same business day. Flat-fee arrangements available for most work.