Blue Sky Laws Explained

Blue Sky Laws are state-level, anti-fraud regulations that require issuers of securities to be registered and to disclose the details of their offerings. Blue Sky Laws create liability for issuers, allowing legal authorities and investors to bring action against them for failing to live up to the law’s provisions.

Blue Sky Laws Apply To What Type of Securities Transaction?

Blue Sky Laws apply to state-regulated securities transactions, including the sale of stocks, bonds, and other financial instruments. They require registration of offerings and licensing for brokerage firms, investment advisors, and their representatives. Some exceptions like certain covered securities exist.

What Needs to Go In?

The registration and qualification requirements of the states' blue sky laws are preempted by the National Securities Market Improvement Act of 1996 (NSMIA) where the offered securities are covered securities.

What Are the Exemptions Under Pennsylvania Law?

Since Blue Sky Laws vary from state to state, the Department of Banking and Securities (DOBS) lays out what these laws say in Pennsylvania. Additionally, the DOBS summarizes exemptions to these laws. In Pennsylvania, the Department has general authority to exempt any security, transaction, or class of transactions if it finds that registration is not necessary or appropriate for the protection of investors.

Under the Pennsylvania Securities Act of 1972, all securities issued within the Commonwealth of Pennsylvania must be registered with the Pennsylvania Department of Banking and Securities unless the security or transaction is exempt. Understanding that the registration process for securities can be both expensive and confusing. The Pennsylvania Securities Act also laid out two exemption categories: Transactional Exemptions and Securities Exemptions.

What Are the Transactional Exemptions?

Transactional exemptions are exemptions that apply when the securities offered and/or sold are of such character that the department does not need to subject the issuer of the securities to the complete registration process.

Generally, the purchaser of a security issued under a transaction exemption cannot resell that security until it is registered or qualifies for another exemption. Some exemptions are self-executing, while others involve filing with the Pennsylvania Department of Banking and Securities. Self-executing means that the issuer of any of the listed securities doesn’t need to file a form or document with the Department to be legally entitled to rely on the exemption.

The registration provisions of the Pennsylvania Securities Act do not apply to any of the following transactions:

Any non-issuer transaction, except where directly or indirectly for the benefit of an affiliate of the issuer.
Non-issuer transactions effected by or through a registered broker-dealer pursuant to an unsolicited order or offer to buy.
Non-issuer transactions directly or indirectly for the benefit of an affiliate of the issuer when carried out pursuant to an exemption from section 5 of the federal Securities Act of 1933, except those transactions exempted pursuant to sections 3(a)(11) or 3(b) of the federal Act and the rules under those provisions.
An offer or sale of securities by an issuer to a principal; or to a corporation, the outstanding voting stock of which is beneficially owned by one or more principals, or to a general or limited partnership, the interest in which is beneficially owned by one or more principals; or a trust, the trustees of which are principals; or any other person, the interest in which is beneficially owned by one or more principals. Pa. Code § 203.184.
Any offer or sale to an institutional investor or to a broker-dealer, whether the buyer is acting for itself or in some fiduciary capacity.
Any offer or sale of a preorganization subscription or securities of a newly formed entity as part of its initial capitalization to not more than five persons.
Any transaction between the issuer or other person on whose behalf an offering is made and an underwriter, or among underwriters.
Any offer (but not a sale) of a security for which a registration statement has been filed under the federal Securities Act of 1933, or a notification of exemption from registration pursuant to Regulation A under the federal Act, if no stop order is in effect or proceeding is pending.
Any offer (but not a sale) of a security of an applicant filing a registration statement by qualification under the Pennsylvania Act which is not yet effective, subject to the applicant meeting certain conditions and qualifications, see Pa. Code § 203.185.
The sale of an equity security (except securities of mutual funds, face amount certificate companies, or unit investment trusts) if (A) the issuer is a reporting company under the federal Securities Exchange Act of 1934; (B) the securities are proposed to be registered under the federal Securities Act of 1933, and in fact become registered; (C) no stop order is in effect and no related proceeding or investigation is pending; (D) the security is listed on a national securities exchange or the NMS or Small Cap Tiers of the Nasdaq Stock Market; and (E) the issuer has not at the time the federal registration statement becomes effective received an auditor’s report for the immediately preceding fiscal year expressing doubt about the issuer’s ability to continue as a going concern (unless the offering is a firm commitment underwriting).
Any transactions in a bond or other evidence of indebtedness that is secured by a mortgage, deed of trust, or by an agreement for the sale of real estate or property if the entire mortgage or other security interest together with the bonds or evidence of indebtedness secured by them is offered and sold as a unit; no mass mailing, public media advertisement, or other form of general solicitation is used; and no compensation is paid or given directly or indirectly for soliciting any person in the state.
Any judicial sale, or any transaction by an executor, administrator, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator.
Any transaction exempted from section 5 of the federal Securities Act of 1933 pursuant to sections 3(a)(9) or 3(a)(10) of that Act.
Any transaction executed by a bona fide pledge without any purpose of evading the Act.
Any transaction pursuant to an offer of securities to existing equity security holders of the issuer or a corporation which, prior to the commencement of the offer, owned substantially all of the voting stock of the issuer; or a corporation which organized the issuer for purposes of the offer, if no commission, other than a standby commission is paid or given directly or indirectly for soliciting any equity security holder in the state.
Any transaction incident to a vote by security holders, or written consent of some or all security holders in lieu of such vote, pursuant to the articles of incorporation, the applicable corporation or other statute governing such entity, or pursuant to a partnership agreement, declaration of trust, trust indenture, or any agreement among security holders, on a merger, consolidation, sale of assets in consideration, in whole or part, for the securities of any other person when certain other conditions are met.
Any offer or sale of evidence of indebtedness of an issuer organized exclusively for educational, benevolent, fraternal, religious, charitable, social, athletic, or reformatory purposes and not for pecuniary profit, if no part of the net earnings of the issuer inures to the benefit of any private shareholder or individual; or is organized as a chamber of commerce or trade or professional association, and certain other conditions including notice filing and payment of a fee are met.
Any bona fide distribution in partial or total liquidation of an entity, and any stock split or stock dividend, when conditions are satisfied.
Offers and sales of securities of qualifying agricultural cooperative associations to persons who are members of the cooperative or to persons who become members by virtue of such sale, and where certain other conditions are satisfied.
Offers and sales of securities of qualifying cooperative business associations, when conditions are satisfied.
Securities issued under an investment plan for employees of an existing entity designed to purchase a newly created entity in transactions that meet specific criteria.
Offers and sales of securities by an issuer that are exempt from registration under the federal Securities Act of 1933 according to Rules 801 or 802 of Regulation D.

Isolated Pennsylvania Issuer Transactions

Isolated offers and sales by an issuer organized under Pennsylvania law or having its principal place of business in the state, are permitted without registration when the following conditions are satisfied:

Sales are made to no more than two persons in the state during a period of 12 consecutive months.
Neither the issuer nor any promoter is subject to any disqualifications.
There is no public media advertising or mass mailing

The following conditions also allow for exemptions:

Limited Offering Exemption (203(d)): Sales by an issuer to no more than 25 persons in Pennsylvania during a period of 12 consecutive months are exempt if the issuer obtains a written agreement from each purchaser not to re-sell the securities within a period of 12 months after the date of purchase; there is no public media advertising or mass mailings; no cash or securities are paid or given to any promoter as compensation; a filing fee is paid, and the issuer provides written notice of the right to withdraw acceptance.
Limited Offering Exemption: 50 Persons in 12 Consecutive Months (P. S. 1-203(e). Any offer to not more than fifty persons in the state during a period of twelve consecutive months is exempt if no sales result from such offer, or if sales are exempt by reason of the P. S. § 1-203(d) exemption noted above or are sales of preorganization subscriptions covered by the exemption in P. S. § 1-203(f), and there is no general solicitation through public media.
SEC Rule 505 Exemption: SEC Rule 505 of Regulation D permits issuers to sell no more than $5 million of securities to 35 non-accredited investors and an unlimited number of accredited investors. The corresponding Pennsylvania exemption is contained in Section 203(s) of the Securities Act. Under that section, an issuer must file the same materials as required under Section 203(d) above.
Accredited Investor Exemption: Offers and sales of securities solely to accredited investors are exempt in Pennsylvania, if certain conditions are satisfied. All sales, both within and outside the state, must be made to accredited investors as that term is defined in Rule 501 of SEC Regulation D under the federal Securities Act of 1933. The exemption is further conditioned on a notice and filing fee, limits on compensation, and no disqualifications.

What Are the Securities Exemptions?

Securities exemptions apply to certain types of securities that, by their nature, need not be registered by the department. The general rationale for these securities exemptions is that regulation of such instruments is either not necessary, or the particular securities already are subject to regulation by another government agency.

The following securities are exempt:

Any security issued or guaranteed by the United States, any state, any political subdivision of a state, any agency, corporate or other instrumentality thereof, or any certificate of deposit for such a security.
Any security issued or guaranteed by a railroad, other common carrier, public utility, or public utility holding company that is: (i) regulated in respect to its rates and charges by the United States or any state; (ii) regulated in respect to the issuance or guarantee of the security by the United States or any state, Canada or any Canadian province or territory; or (iii) a public utility holding company registered under the Public Utility Holding Company Act of 2005 or a subsidiary of such registered holding company within the meaning of that statute.
Guaranties of certain debt securities. A guaranty of a bond offered and sold in Pennsylvania if certain conditions are met, including use of an official statement or other disclosure document containing specified financial information, where the proceeds of the offering are utilized for the benefit of certain facilities, and where the guarantor and a trust indenture meet certain requirements.
Commercial paper of the note arising out of a current transaction, or the proceeds of which have been or are to be used for a current transaction, and which evidences an obligation to pay cash within nine months of the date of issuance, or any renewal or guarantee of such paper on the same terms, except where such paper is proposed to be sold or offered to the public in units of less than $5,000 to any single person.
Any security issued or guaranteed by any federal credit union or any credit union, industrial loan association, or other similar association organized and supervised under the laws of Pennsylvania.
Any security listed or approved upon issuance for listing upon notice of issuance on designated stock exchanges, and any securities of a senior or substantially equal rank to such listed or approved securities.
Any security (except evidence of indebtedness, whether interest-bearing or not) of an issuer organized exclusively for educational, benevolent, fraternal, religious, charitable, social, athletic, or reformatory purposes and not for pecuniary profit, if no part of the net earnings of the issuer inures to the benefit of any private shareholder or individual; or is organized as a chamber of commerce or trade or professional association.
Securities issued in connection with contributions or transfers of property to, or certificates of interest or participation in, pooled income funds when certain conditions are satisfied, see Pa. Code § 202.093.
Securities issued or created in connection with the offer or sale of charitable gift annuities, see Pa. Code § 202.095.
Any security issued in connection with an employee’s stock option, purchase, savings, pension, profit-sharing, or similar benefit plan.
Any security of a registered broker-dealer issued to its officers, partners or employees, but subject to such regulations as the Commission can impose.
A membership interest in a limited liability company that renders one or more professional services. Additionally, shares of professional corporations, except that the exemption does not apply to a transaction entered into primarily to avoid the registration provisions of the Act or made in violation of antifraud provisions.
Securities of certain “world-class” issuers meeting requirements established by rule, see Pa. Code § 202.094.

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