FAQS
What are Blue Sky Laws?
- Financing
- Types of Financing
TL;DR: Blue Sky Laws are U.S. state securities laws related to selling and issuing securities.
The term “Blue Sky Laws” refers to various state-level securities statutes and regulations in the U.S.. Like federal securities laws, Blue Sky Laws are intended to protect investors from fraud by subjecting issuers of securities to certain registration and disclosure requirements. For start-up companies and their founders, these laws are relevant any time a company issues securities to a person or entity in the U.S. This can include the sale of securities (including stock, convertible notes, and SAFEs) to investors and the granting of options, restricted stock, or restricted stock units to employees or contractors.
Financing Transactions:
- Any time a U.S. company sells securities to investors located in the U.S., the transaction will be subject to federal and state securities laws.
- Prior to closing a financing transaction, your legal counsel should review the terms of the deal and the identities and locations of your investors to ensure that the sale is in compliance with all relevant federal and Blue Sky Laws.
- After closing, your legal counsel may advise you to file a Form D with the SEC (see: “What is a Form D and when should it be filed?” [link to #25 in this document]) and to make similar filings in some or all the states where your investors are located. Each state has different requirements, but many have strict deadlines, with some requiring filing no later than 15 days after the transaction closes. Your legal counsel should be able to prepare and file the relevant forms electronically in any state.
Equity Grants:
- Before making any form of equity grant (including stock options, restricted stock grants, and restricted stock units (RSUs)) to an employee or contractor, a company should inform their legal counsel of the grant recipients’ details and state of residence.
- Legal counsel will then ensure the offering complies with applicable state laws. For example, California requires timely filing of notice that a grant has been made to California residents and requires compliance with other requirements in order for a company to rely on an exemption and avoid formal registration processes.
It is critical that companies are aware of and comply with relevant Blue Sky Laws. Consequences of non-compliance can include rescission of a company sale, derailing of an IPO or acquisition due to diligence issues, state enforcement actions, and potential legal action from stockholders.
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