The Penalties of Delaware’s Blue Sky Laws

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• Registration Requirements & Anti-Fraud Laws
• Administrative, Civil & Criminal Penalties

If you deal in in any kind of investment product you need to be cognizant of both federal and state securities laws. Most people know that securities are regulated at the federal level by the U.S. Securities and Exchange Commission (SEC), but all states have their own laws designed to protect individual investors from deceptive or fraudulent transactions. These state-level rules are commonly known as “blue sky” laws, a term credited to a 1917 Supreme Court decision that referred to “speculative schemes which have no more basis than so many feet of blue sky.”

Registration Requirements & Anti-Fraud Laws

Delaware’s blue sky laws are contained in Title 6, Chapter 73 of the Delaware Code. In general, it is illegal to offer any securities for sale in Delaware unless it is registered with the state or falls under one of several exemption categories. For example, securities traded on a national stock exchange do not have to be separately registered in Delaware. Securities issued by any federal, state or local government agency are also exempt. So are securities issued by most financial institutions, such as banks, credit unions and savings and loans. Regardless of registration status, the Delaware Code declares it illegal for any person acting “in connection with the offer, sale or purchase of any security” to engage in fraud. This includes any “device, scheme or artifice to defraud,” as well as making any “untrue statement of a material fact,” including an omission of a material fact, or to “engage in any act, practice or course of business” designed to function as a “fraud or deceit upon any person.” This language largely mirrors that of federal securities laws.

Administrative, Civil & Criminal Penalties

The Attorney General of Delaware enforces the state’s securities laws through their Investor Protection Unit (IPU). The IPU is authorized to investigate and pursue administrative charges against anyone accused of offering illegal or fraudulent securities within five years of the alleged violation. The director of the IPU may impose a wide range of civil remedies, including a fine of $10,000 per violation, restitution to any affected investors, and a cease and desist order. Please note, any administrative penalty issued by the IPU is subject to judicial review. An experienced Delaware securities attorney can advise you of your rights in these situations. For more information about this area, read our securities and corporate finance law overview. Beyond administrative remedies, Delaware also provides for civil and criminal liability in securities fraud cases. Criminal penalties vary depending on the amount of investor losses. For instance, if a person willfully violates Section 73-201, and as a result investors lose at least $50,000, the violator may be charged with a Class E felony, which carries a maximum sentence of five years in prison and a $200,000 fine. For investor losses of between $10,000 and $50,000, securities fraud is a Class F felony, which carries lesser penalties of up to three years in jail and a $100,000 fine. Securities transactions are rife with possible dangers, between the federal securities act, SEC rules, and state blue sky laws, so it’s best to err on the side of caution.