Blue Sky? Isn’t that a song?

First of all, Irving Berlin’s song was called Blue Skies.

Second, Blue Sky laws are an important but unheralded part of the startup process.  Without them, your company would be essentially worthless.  You wouldn’t be able to buy or sell your company’s stock!

Blue sky laws, which differ from state to state, must be fulfilled any time stock is sold to the public without an initial public offering.  In other words, any time you issue stock to an employee, or even to yourself as a founder, you must file your state’s relevant Blue Sky law.  California’s is known as a 25102(f) filing.

The Context

Four years after the 1929 Stock Market Crash, Congress enacted the Securities Act of 1933.  The main thrust of this act was to protect investors by requiring companies that sold stock to register with the SEC.  This registration produced a host of financial disclosures to ensure that the investors could make informed decisions.  It was at its heart an anti-fraud statute.

However, the 1933 Act did include one exception for not having to register with the SEC – exemptions.  If the sale of stock fits into one of a limited number of exemptions, they will be able to sell stock outside of a public offering without registering.  This is known as a Regulation D filing.

Each state’s Blue Sky law is essentially the equivalent to the federal Regulation D, and enumerates exemptions that are not subject to registration requirements.  This may sound stringent, but rest assured, it is highly unlikely that they will prevent you or your co-founder from receiving your stock.

So What Do I Have To Do?

  • For an employee or founder (or investor) to be able to buy stock from a startup, it must fulfill and file one state and one federal exemption.
  • The Regulation D must be filed within 15 days of the first sale of stock within the state
  • The Blue Sky filing must be filed within 30 days of the sale.
  • Be careful of your sales integrating.  Many exemptions are based on having a limited number of buyers of stock.  If you have sales each month for example, and the total number of buyers exceeds 35, your sales have integrated, and you have just disqualified your exemption.

Instead of Copy/Pasting, Here Are The Actual Exemptions


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