Blue Sky Law
LSI ANNUAL CONFERENCE 2008 – BLUE SKY LAW
By Jim Gulseth, JGPC LAW, Pleasanton, California
I. What Are “Blue Sky” Laws?
“A blue sky law is a state law in the United States that regulates the offering and sale of
securities to protect the public from fraud. Though the specific provisions of these laws
vary among states, they all require the registration of all securities offerings and sales, as
well as of stock brokers and brokerage firms. Each state’s blue sky law is administered by
its appropriate regulatory agency, and most also provide private causes of action for
private investors who have been injured by securities fraud.” Blue sky law From
Wikipedia, the free encyclopedia.
II. Where Are California’s Blue Sky Laws Found?
California’s Blue Sky Laws are found in Sections 25000 through 25707 o f the California
Corporations Code, which sections are known as the Corporate Securities Law of 1968
(the “CSL”) and in the Regulations promulgated by the Department of Corporations.
The framework for California’s Blue Sky Laws is found in Sections 25110, 25120 and
25130 of the CSL.
(a) Section 25110. Necessity of qualification of security or exemption of security or
transaction
“It is unlawful for any person to offer or sell in this state any security in an issuer
transaction (other than in a transaction subject to Section 25120), whether or not by or
through underwriters, unless such sale has been qualified under Section 25111, 25112 or
25113 (and no order under Section 25140 or subdivision (a) of Section 25143 is in effect
with respect to such qualification) or unless such security or transaction is exempted or
not subject to qualification under Chapter 1 (commencing with Section 25100) of this
part. The offer or sale of such a security in a manner that varies or differs from, exceeds
the scope of, or fails to conform with either a material term or material condition of
qualification of the offering as set forth in the permit or qualification order, or a material
representation as to the manner of offering which is set forth in the application for
qualification, shall be an unqualified offer or sale.” (b) Section 25120. Necessity of qualification
of security or exemption of security or transaction
“(a) Except as provided in subdivision (b), it is unlawful for any person to offer or sell in
this state any security in any of the following manners:
(1) In an issuer transaction in connection with any change in the rights, preferences,
privileges, or restrictions of or on outstanding securities.
(2) In any exchange of securities by the issuer with its existing security holders
exclusively.
(3) In any exchange in connection with any merger or consolidation or purchase of
assets in consideration wholly or in part of the issuance of securities.
(4) In an entity conversion transaction.
(b) Subdivision (a) shall not apply to a security if the security is qualified for sale under
this chapter (and no order under Section 25140 or subdivision (a) of Section 25143 is in
effect with respect to the qualification) or if the security or transaction is exempted or not
subject to qualification under Chapter 1 (commencing with Section 25100) of this part.”
(c) Section 25130. Necessity of qualification of security or exemption of security or
transaction
“It is unlawful for any person to offer or sell any security in this state in any nonissuer
transaction unless it is qualified for such sale under this chapter or under Section 25111
or 25113 of Chapter 2 (commencing with Section 25110) of this part (and no order under
Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such
qualification) or unless such security or transaction is exempted or not subject to
qualification under Chapter 1 (commencing with Section 25100) of this part”.
III. Haven’t the Federal Securities Laws Significantly Reduced the Importance of State
Blue Sky Laws?
(a) Every “offer” or “sale” of securities in California must be “qualified” under the CSL
and “registered” under Federal Securities Law unless either the security or the transaction
is exempt under applicable California and federal laws. However, Federal Securities
Laws Administered by the Securities and Exchange Commission (”SEC”) have
preempted much of the scope of Blue Sky Laws. Examples of SEC preemption include
control over any securities traded on a national stock exchange such as the New York
Stock Exchange (“NYSE”), the American Stock Exchange (“AMEX”) or NASDAQ.
These securities are called “covered securities” and are exempt from Blue Sky Law.
(b) Blue Sky Law enforcement is usually limited to securities of smaller entities and/or
intrastate transactions, which includes many private offering securities transactions. In
Blue Sky Law – Jim Gulseth, JGPC Law: LSI Annual Conference 2008 Page 2 addition, some states, such as California, insist on following their own regulatory
procedures for registering both broker-dealer firms and their registered employees.
(c) Even Blue Sky Laws that still apply must often be interpreted in the context of
Federal Securities Laws.
IV. Who Or What is a “Person” under Blue Sky Laws?
1. Section 25013. Person.
“Person” means an individual, a corporation, a partnership, a limited liability company, a
joint venture, an association, a joint stock company, a trust, an unincorporated
organization, a government, or a political subdivision of a government.” … and much,
much more.
2. Section 25010. Issuer
“Issuer” means any person who issues or proposes to issue any security,…”
V. What Are These ‘Persons” as defined under Blue Sky Law?
(a) Natural and Unnatural Persons Under California Law. What is the difference?
i. Natural Persons or Individuals
ii. Unnatural Persons or “Entities”
iii. Types of Entities:
1. Corporations
a. For Profit
b. Non Profit
2. General Partnership, the default entity
3. Limited Partnership (LP)
a. General Partner
b. Limited Partner
4. Limited Liability Company (LLC)
Blue Sky Law – Jim Gulseth, JGPC Law: LSI Annual Conference 2008 Page 3 VI What Are Securities?
(a). Cal Corp Code Section 25019. Security
“Security” means any note; stock; treasury stock; membership in an incorporated or
unincorporated association; bond; debenture; evidence of indebtedness; certificate of
interest or participation in any profit-sharing agreement; collateral trust certificate;
preorganization certificate or subscription; transferable share; investment contract;
viatical settlement contract or a fractionalized or pooled interest therein; life settlement
contract or a fractionalized or pooled interest therein; voting trust certificate; certificate of
deposit for a security; interest in a limited liability company and any class or series of
those interests (including any fractional or other interest in that interest), except a
membership interest in a limited liability company in which the person claiming this
exception can prove that all of the members are actively engaged in the management of
the limited liability company; provided that evidence that members vote or have the right
to vote, or the right to information concerning the business and affairs of the limited
liability company, or the right to participate in management, shall not establish, without
more, that all members are actively engaged in the management of the limited liability
company; certificate of interest or participation in an oil, gas or mining title or lease or in
payments out of production under that title or lease; put, call, straddle, option, or
privilege on any security, certificate of deposit, or group or index of securities (including
any interest therein or based on the value thereof); or any put, call, straddle, option, or
privilege entered into on a national securities exchange relating to foreign currency; any
beneficial interest or other security issued in connection with a funded employees’
pension, profit sharing, stock bonus, or similar benefit plan; or, in general, any interest or
instrument commonly known as a “security”; or any certificate of interest or participation
in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to
subscribe to or purchase, any of the foregoing. All of the foregoing are securities whether
or not evidenced by a written document. “Security” does not include: (1) any beneficial
interest in any voluntary inter vivos trust which is not created for the purpose of carrying
on any business or solely for the purpose of voting, or (2) any beneficial interest in any
testamentary trust, or (3) any insurance or endowment policy or annuity contract under
which an insurance company admitted in this state promises to pay a sum of money
(whether or not based upon the investment performance of a segregated fund) either in a
lump sum or periodically for life or some other specified period, or (4) any franchise
subject to registration under the Franchise Investment Law (Division 5 (commencing
with Section 31000)), or exempted from registration by Section 31100 or 31101.” See
also S.E.C. v. W.J. Howey Co., 328 US 293 (1946)
(b) A Security is a Passive Investment in a For-profit Entity:
Securities are either an equity security (“equity”) such as shares of stock in a
corporation or membership interests in an LLC; or
debt securities such debentures, bonds, notes or commercial paper.
Blue Sky Law – Jim Gulseth, JGPC Law: LSI Annual Conference 2008 Page 4 (c) What are the elements of a Security?
1. A security is a bundle of rights in an entity that could include “economic rights” and
“non-economic rights”
i. Economic rights include a “capital interest” and “profits interest”; and
ii. “Non-economic rights” could include management and control rights, voting
rights and information access rights.
2. Lack of Management and/or Control Rights in a for-profit entity establishes the
existence of a “Security”.
3. Application of This analysis to the different types of Entities.
VII. Why Do We Care If We Comply With Blue Sky Laws, or Any Securities Laws?
(a) Rights of Rescission.
(b) Fraud & Misrepresentation Causes of Action.
VIII. How Does an Issuer Comply With California Blue Sky Laws?
(a) Qualification or an Exemption
(b) Exempt Securities, Corp Code Section 25100
1. 25100 (a) federal, state & local entity bonds
2. 25100(c) & (d) federal and state chartered banks & savings associations
3. 25100 (o) Any security listed on a national securities exchange or Nasdaq
(c) Exempt Transactions, Cal Corp Code Section 25102.
1. 25102 (f) Also check the Regulations for Details.
2. 25102 (h)
3. 25102 (n) Sales to Qualified Purchasers
4. 25102 (o) Employee Stock Option Purchase Plans
ii. Federal Preemption Exemptions.
1. Regulation D, particularly the Section 506 exemption.
2. “Covered Securities” Publicly traded Securities
Blue Sky Law – Jim Gulseth, JGPC Law: LSI Annual Conference 2008 Page 5 IX. Where do You Find the Forms and Information for California Blue Sky Laws?
It is all on the Internet at www.corp.ca.gov/
X. What about Other states Blue Sky Laws?
An exemption from federal securities registration requirements and from California’s
qualification requirements does not necessarily exempt securities from other states Blue Sky
Laws. If an issuer is offering or selling securities to a resident of another state, the issuer must
comply with that states Blue Sky Laws, which may be very different from those of California.
XI. The Future?
(a) The Need for national competitive efficiency will provide pressure for
elimination/reduction of Blue Sky Laws. But don’t hold your breath. Blue Sky Laws in
some form will probably be around for a long time.
Blue Sky Law – Jim Gulseth, JGPC Law: LSI Annual Conference 2008 Page 6
BLUE SKY LAW By Jim Gulseth JGPC LAW Pleasanton, California LSI ANNUAL CONFERENCE 2008 I. What Are “Blue Sky” Laws? “A blue sky law is a state law in the United States that regulates the offering and sale of securities to protect the public from fraud. Though the specific provisions of these laws vary among states, they all require the registration of all securities offerings and sales, as well as of stock brokers and brokerage firms. Each state’s blue sky law is administered by its appropriate regulatory agency, and most also provide private causes of action for private investors who have been injured by securities fraud.” Blue sky law From Wikipedia, the free encyclopedia. II. Where Are California’s Blue Sky Laws Found? California’s Blue Sky Laws are found in Sections 25000 through 25707 o f the California Corporations Code, which sections are known as the Corporate Securities Law of 1968 (the “CSL”) and in the Regulations promulgated by the Department of Corporations. The framework for California’s Blue Sky Laws is found in Sections 25110, 25120 and 25130 of the CSL. (a) Section 25110. Necessity of qualification of security or exemption of security or transaction“It is unlawful for any person to offer or sell in this state any security in an issuer transaction (other than in a transaction subject to Section 25120), whether or not by or through underwriters, unless such sale has been qualified under Section 25111, 25112 or 25113 (and no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification) or unless such security or transaction is exempted or not subject to qualification under Chapter 1 (commencing with Section 25100) of this part. The offer or sale of such a security in a manner that varies or differs from, exceeds the scope of, or fails to conform with either a material term or material condition of qualification of the offering as set forth in the permit or qualification order, or a material representation as to the manner of offering which is set forth in the application for qualification, shall be an unqualified offer or sale.” (b) Section 25120. Necessity of qualification of security or exemption of security or transaction“(a) Except as provided in subdivision (b), it is unlawful for any person to offer or sell in this state any security in any of the following manners: (1) In an issuer transaction in connection with any change in the rights, preferences, privileges, or restrictions of or on outstanding securities. (2) In any exchange of securities by the issuer with its existing security holdersexclusively.(3) In any exchange in connection with any merger or consolidation or purchase of assets in consideration wholly or in part of the issuance of securities. (4) In an entity conversion transaction. (b) Subdivision (a) shall not apply to a security if the security is qualified for sale under this chapter (and no order under Section 25140 or subdivision (a) of Section 25143 is ineffect with respect to the qualification) or if the security or transaction is exempted or not subject to qualification under Chapter 1 (commencing with Section 25100) of this part.”(c) Section 25130. Necessity of qualification of security or exemption of security ortransaction“It is unlawful for any person to offer or sell any security in this state in any nonissuertransaction unless it is qualified for such sale under this chapter or under Section 25111 or 25113 of Chapter 2 (commencing with Section 25110) of this part (and no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification) or unless such security or transaction is exempted or not subject to qualification under Chapter 1 (commencing with Section 25100) of this part”. III. Haven’t the Federal Securities Laws Significantly Reduced the Importance of State Blue Sky Laws? (a) Every “offer” or “sale” of securities in California must be “qualified” under the CSL and “registered” under Federal Securities Law unless either the security or the transaction is exempt under applicable California and federal laws. However, Federal Securities Laws Administered by the Securities and Exchange Commission (”SEC”) have preempted much of the scope of Blue Sky Laws. Examples of SEC preemption include control over any securities traded on a national stock exchange such as the New YorkStock Exchange (“NYSE”), the American Stock Exchange (“AMEX”) or NASDAQ. These securities are called “covered securities” and are exempt from Blue Sky Law. (b) Blue Sky Law enforcement is usually limited to securities of smaller entities and/or intrastate transactions, which includes many private offering securities transactions. In Blue Sky Law – Jim Gulseth, JGPC Law: LSI Annual Conference 2008 Page 2 addition, some states, such as California, insist on following their own regulatory procedures for registering both broker-dealer firms and their registered employees. (c) Even Blue Sky Laws that still apply must often be interpreted in the context ofFederal Securities Laws. IV. Who Or What is a “Person” under Blue Sky Laws? 1. Section 25013. Person. “Person” means an individual, a corporation, a partnership, a limited liability company, a joint venture, an association, a joint stock company, a trust, an unincorporated organization, a government, or a political subdivision of a government.” … and much, much more. 2. Section 25010. Issuer “Issuer” means any person who issues or proposes to issue any security,…” V. What Are These ‘Persons” as defined under Blue Sky Law?(a) Natural and Unnatural Persons Under California Law. What is the difference? i. Natural Persons or Individuals ii. Unnatural Persons or “Entities” iii. Types of Entities: 1. Corporations a. For Profit b. Non Profit 2. General Partnership, the default entity 3. Limited Partnership (LP) a. General Partner b. Limited Partner 4. Limited Liability Company (LLC) Blue Sky Law – Jim Gulseth, JGPC Law: LSI Annual Conference 2008 Page 3 VI What Are Securities? (a). Cal Corp Code Section 25019. Security“Security” means any note; stock; treasury stock; membership in an incorporated or unincorporated association; bond; debenture; evidence of indebtedness; certificate of interest or participation in any profit-sharing agreement; collateral trust certificate;preorganization certificate or subscription; transferable share; investment contract; viatical settlement contract or a fractionalized or pooled interest therein; life settlement contract or a fractionalized or pooled interest therein; voting trust certificate; certificate of deposit for a security; interest in a limited liability company and any class or series of those interests (including any fractional or other interest in that interest), except a membership interest in a limited liability company in which the person claiming thisexception can prove that all of the members are actively engaged in the management of the limited liability company; provided that evidence that members vote or have the right to vote, or the right to information concerning the business and affairs of the limited liability company, or the right to participate in management, shall not establish, without more, that all members are actively engaged in the management of the limited liability company; certificate of interest or participation in an oil, gas or mining title or lease or in payments out of production under that title or lease; put, call, straddle, option, orprivilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof); or any put, call, straddle, option, orprivilege entered into on a national securities exchange relating to foreign currency; any beneficial interest or other security issued in connection with a funded employees’pension, profit sharing, stock bonus, or similar benefit plan; or, in general, any interest orinstrument commonly known as a “security”; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. All of the foregoing are securities whether or not evidenced by a written document. “Security” does not include: (1) any beneficial interest in any voluntary inter vivos trust which is not created for the purpose of carrying on any business or solely for the purpose of voting, or (2) any beneficial interest in any testamentary trust, or (3) any insurance or endowment policy or annuity contract under which an insurance company admitted in this state promises to pay a sum of money (whether or not based upon the investment performance of a segregated fund) either in a lump sum or periodically for life or some other specified period, or (4) any franchisesubject to registration under the Franchise Investment Law (Division 5 (commencing with Section 31000)), or exempted from registration by Section 31100 or 31101.” Seealso S.E.C. v. W.J. Howey Co., 328 US 293 (1946) (b) A Security is a Passive Investment in a For-profit Entity: Securities are either an equity security (“equity”) such as shares of stock in a corporation or membership interests in an LLC; or debt securities such debentures, bonds, notes or commercial paper. Blue Sky Law – Jim Gulseth, JGPC Law: LSI Annual Conference 2008 Page 4 (c) What are the elements of a Security? 1. A security is a bundle of rights in an entity that could include “economic rights” and “non-economic rights” i. Economic rights include a “capital interest” and “profits interest”; and ii. “Non-economic rights” could include management and control rights, voting rights and information access rights. 2. Lack of Management and/or Control Rights in a for-profit entity establishes theexistence of a “Security”. 3. Application of This analysis to the different types of Entities. VII. Why Do We Care If We Comply With Blue Sky Laws, or Any Securities Laws? (a) Rights of Rescission. (b) Fraud & Misrepresentation Causes of Action. VIII. How Does an Issuer Comply With California Blue Sky Laws? (a) Qualification or an Exemption (b) Exempt Securities, Corp Code Section 25100 1. 25100 (a) federal, state & local entity bonds 2. 25100(c) & (d) federal and state chartered banks & savings associations 3. 25100 (o) Any security listed on a national securities exchange or Nasdaq (c) Exempt Transactions, Cal Corp Code Section 25102. 1. 25102 (f) Also check the Regulations for Details. 2. 25102 (h) 3. 25102 (n) Sales to Qualified Purchasers 4. 25102 (o) Employee Stock Option Purchase Plans ii. Federal Preemption Exemptions. 1. Regulation D, particularly the Section 506 exemption. 2. “Covered Securities” Publicly traded Securities Blue Sky Law – Jim Gulseth, JGPC Law: LSI Annual Conference 2008 Page 5 IX. Where do You Find the Forms and Information for California Blue Sky Laws? It is all on the Internet at www.corp.ca.gov/ X. What about Other states Blue Sky Laws? An exemption from federal securities registration requirements and from California’s qualification requirements does not necessarily exempt securities from other states Blue SkyLaws. If an issuer is offering or selling securities to a resident of another state, the issuer must comply with that states Blue Sky Laws, which may be very different from those of California. XI. The Future? (a) The Need for national competitive efficiency will provide pressure for elimination/reduction of Blue Sky Laws. But don’t hold your breath. Blue Sky Laws in some form will probably be around for a long time. Blue Sky Law – Jim Gulseth, JGPC Law: LSI Annual Conference 2008 Page 6