Who is Exempt From Blue Sky Laws?
In principle, everyone knows to take the claims in advertisements with a grain of salt. When the advertisements are for physical products, it is easy to go to a physical store and see if the product is as great as the commercials say it is. In the case of advertisements for investments that are far removed from a physical product, it is more challenging to verify advertisers’ claims. It is easy to find stories in the news about businesses that defrauded investors; you have probably seen the names of Elizabeth Holmes of Theranos and Ruja Ignatova of OneCoin in the news this week. Federal and state laws are in place to protect consumers from fraudulent claims by businesses that solicit investments; these are called blue sky laws. A Whittier civil litigation lawyer can help you resolve disputes over allegedly misleading claims in advertisements for investment opportunities.
How Do Blue Sky Laws Work?
In the early 20th century, business success was the American Dream, and everyone with a few pennies to spare was looking for a way to invest them. This was the age of Charles Ponzi, the namesake of the Ponzi scheme, and so many other fraudsters. A judge in Kansas wrote a decision in which he claimed that the purveyors of these schemes were persuading investors to attempt to buy “blue sky,” hence the term “blue sky laws.” Investment in scams was one of the factors that led to the 1929 stock market crash. Therefore, the federal government created the Securities Exchange Commission in 1933 to regulate investment opportunities and the solicitation of investments.
Blue sky laws require investment brokers and similar businesses to be transparent with consumers about the risks involved with their investments. When an investment broker operates in more than one state, they must register in all the states in which they operate. In other words, blue sky laws ensure that when consumers see an advertisement for an investment opportunity, several knowledgeable people have already reviewed it to ensure that it is not riskier than the brokers are making it sound.
Does Rule 506 of Regulation D Leave Investors Vulnerable to Fraud?
Blue sky laws contain exemptions for certain investment opportunities. For example, investments listed on national stock exchanges are exempt from state-level blue sky laws because they are already regulated under federal law. Likewise, certain private funds are exempt, but Rule 506 of Regulation D of the Securities Act of 1933 limits the risk associated with these funds. Specifically, it allows these funds to accept investments from as many accredited investors as possible, professional investors. Still, it limits the number of non-accredited investors, individuals without professional investing experience, who can invest in these funds.
Contact the Law Offices of Omar Gastelum About Blue Sky Law Disputes
A civil litigation attorney can help you resolve disputes about wrong business investments. Contact the Law Offices of Omar Gastelum and Associates APLC in Whittier, California, to set up a consultation.
State laws, known as blue sky laws, protect consumers from investment scams, but private funds and federally regulated investments are exempt.
