The business world is increasingly global, but when it comes to seeking investors for your startup there are rules state to state you need to be aware of. With the changes introduced and adopted by the SEC that have opened the door for increased crowdfunding activity, we thought it was a good time to talk about the ‘blue sky’ laws in place, how they too are changing, and how they can affect investment activities at your startup.
Blue Sky Laws: A Refresher
Use of the term “blue sky” can be traced back to the early 1900s, when a written opinion from a U.S. Supreme Court Justice referred to “speculative schemes which have no more basis than so many feet of ‘blue sky’”. Today, so-called blue sky laws are state-level statutes designed to help protect investors and prevent fraud.
Blue Sky Common Ground
Sellers of securities (companies offering shares in exchange for capital), brokerage firms and stockbrokers are required to provide financial data and register in each state in which they do business and intend to offer and accept securities. There are provisions under which exemptions may be permitted. Most states’ ‘blue sky’ laws also give private investors who fall victim to securities fraud the opportunity to seek redress through legal causes of action.
These ‘blue sky’ laws, like their federal cousin, The Securities Act of 1933, were all enacted when business activities were much more locally-focused, before there was Internet, and certainly before there was the new age of crowdfunding.
Crowdfunding Activities Spur Changes
The list of businesses for which state boundaries are irrelevant, except for jurisdictional inception, continues to grow. And when those startup businesses decide to raise capital through crowdfunding, which is often leverages Internet-based promotion and easily crosses state lines, the requirement to register in each state where an investment might be secured or business conducted becomes onerous and costly.
Many states – approximately two dozen – have either enacted intrastate crowdfunding exemptions or amendments to their existing ‘blue sky’ laws to allow companies to take part in some types of crowdfunding within state lines and without having to federally register. And the new mini-IPO Reg A+ rules that have recently taken affect also offer an exemption option.
As always, it is a good idea to check with a securities lawyer before you embark on any capital-raising initiative, whether or not it involves crowdfunding, blue skay laws, the new mini-IPO rules, or a full-on IPO.
Verifying your investors are accredited is still a federal requirement for the most power way to raise capital today. We’re the experts on accredited investor verification. Have questions? Contact us today and we’ll be happy to help. Visit VerifyInvestor.com.
