This is the first of a series which will highlight the finer points of state Blue Sky Laws – and what to keep in mind if you are planning to prepare a Blue Sky Survey for a municipal bond transaction.

The lack of uniformity among state Blue Sky Laws makes legal interpretation challenging. Practitioners must be well-versed with individual state’s laws, regulations, policy statements and no action letters.

• State Blue Sky Laws are based on the (i) Uniform Securities Act of 1956, (ii) Revised Uniform Securities Act of 1985 (both of which have been preempted in part by the National Securities Markets Improvement Act of 1996 (“NSMIA”)) and (iii) Uniform Securities Act of 2002 (the “2002 Act”).

• States have adopted different approaches -- incorporating some elements, but not all, from each of the three uniform acts. State approaches generally fall in one of the following categories:

• • State law is based solely on the 1956 Act;
  • State law is based on the 1956 Act plus the 1985 Act;
  • State law is based on the 2002 Act, which was written to not have a conflict by making it clear in areas where the states can pre-empt;
  • State law reflects a selection of different provisions (i.e., cherry pick);
• But, remember, NSMIA preempts in part state law, so the analysis requires more than one inquiry. An illustrative example of this relates to the definition of an exempt security.

• • The 2002 Act expanded the definition of “exempt security,” to include any “separate security” as defined in Rule 131 (17 C.F.R. 230.131) adopted under the Securities Act of 1933. For states that adopted the 2002 Act, the analysis is straightforward.
  • For the states that did not adopt the 2002 Act or by regulation, issuance of no action letters and/or policy statements, the following applies:
    • If one security (sale, lease or loan agreement, bond insurance policy, letter of credit, etc.) requires registration or a notice filing, they all do.
    • NSMIA applies; and
      • If the security in question is a federal covered security, states may require a notice filing, but the security itself is exempt.
      • For securities that are not federal covered securities, other exemptions may apply, such as is it a security guaranteed by a bank or is it issued by a not-for-profit corporation. Beware, notice filings may still be required nonetheless.
• Bottom line: Understand the interplay between federal law and the state’s ability to regulate the offer and sale of securities within its jurisdiction. Experienced practitioners can easily interpret the state Blue Sky Laws differently and often do.