Companies that trade on the OTCQX® or OTCQB® Markets, and the FINRA registered broker-dealers who quote and trade those securities, have all run into Blue Sky laws. Blue Sky laws are the state-level securities laws that govern how a security can be offered and traded inside each U.S. state, district or territory. They sit alongside federal securities laws, and FINRA regulations for broker-dealers trading securities that are not listed on a national securities exchange. These regulations have long shaped the states and jurisdictions where a stock can be offered, recommended, or discussed with clients of broker-dealers and investment advisors. On May 19, 2026, the SEC proposed a rulemaking, Release No. 33-11418, that would change how those state laws apply to SEC-registered offerings and the trading that follows. This post explains Blue Sky laws, how they currently apply to securities trading on OTC Markets, and what the SEC proposal would mean for OTCQX and OTCQB issuers and the brokers who trade their stock.
What Blue Sky laws are, and why they matter
Every U.S. state, as well as the District of Columbia and all three territories, has its own securities statutes. Many of these laws predate the federal securities laws by more than a decade and were written to protect investors within each state’s borders. In practice, a Blue Sky law governs three things: whether a security can be offered or sold into the state, whether a broker or advisor can distribute research, recommend or solicit investors, and what financial qualifications, filings or exemptions are applicable. State law treats the initial offering (when a company sells shares to investors) and the secondary trading of those shares (when investors trade with one another) as two separate events, and each must clear its own state requirement. The federal and state systems run in parallel, so a security can clear federal review and still need to satisfy the rules of each state where it trades.
For NYSE-listed companies, this stopped being a practical concern in 1996 when the National Securities Markets Improvement Act created a category of “covered securities” under Section 18 of the Securities Act, whereby securities listed on a national exchange were exempted from Blue Sky law requirements. For NASDAQ-listed companies, NASDAQ’s registration as an exchange in 2006 expanded coverage to all issuers. Covered securities are preempted from state registration and review, which means the federal standard takes precedence over state-by-state standards. Most securities that trade over-the-counter were not included, which is why maximizing Blue Sky compliance is important. It improves overall market quality and streamlines compliance for broker-dealers.
The effect on trading is concrete. Where a security is not registered or exempt in a given state, issuers cannot sell securities to investors, and secondary trading is limited to institutional and self-directed investors. Without demonstrated compliance with state securities laws, doors are shut, accounts are off limits and investors are left on their own, as a broker or financial advisor in that state generally cannot research it, recommend it, solicit it, or in some cases even discuss it with a customer. State laws include a “right of rescission,” which means an investor can ask for their money back from an issuer in a primary offering or a broker that executed a secondary trade if the issuer is not Blue Sky compliant in that state, so the risk is real and some firms will even block unsolicited orders. Those restrictions narrow investor access, reduce broker engagement, and can limit liquidity in the stock even in the larger companies on which wealth advisors and brokers may tend to focus.
How OTC Markets companies clear Blue Sky today
A majority of states allow secondary trading in OTC Markets securities through what is known as the manual exemption, which permits a broker to recommend and trade a security if current information about the company is publicly available in a recognized securities manual or its digital equivalent. There are other transaction-specific exemptions available which may permit certain trades even where the manual exemption is unavailable. For example, states permit unsolicited or self-directed transactions that are initiated by the customer, as well as transactions involving institutional investors. However, these exemptions are narrower than the manual exemption because they are transaction-specific, rather than broadly applicable to any secondary trading in the security.
Forty-four states and jurisdictions maintain some form of the manual exemption described above. The principle behind it is disclosure-based and reflects the idea that investor protection comes from the availability of current, public information about the company, not from a separate registration filing in every state. Securities manuals were a way to ensure any investor could find a baseline of information about a company from a reputable third party at their local library. That principle has only grown stronger as company disclosure has continued to move online and become available for free to all investors. SEC-reporting companies file through the SEC’s EDGAR system, and companies that report through OTC Markets publish their financials and news on our public disclosure platform, so an investor can find current information on a company regardless of where its stock trades.
When we launched OTCQX, we focused on improving market quality by informing investors and increasing compliance with securities laws. The market rules used the baseline of Blue Sky disclosure and financial standards of the Uniform State Securities Act to ensure that company qualifications aligned with established state requirements. However, each state must recognize a market or a manual, and OTC Markets has spent nearly two decades earning that recognition, one jurisdiction at a time. Since July 1, 2025, OTCQX securities qualified for secondary-trading exemptions in 41 U.S. states and jurisdictions, and OTCQB securities in 37. Where our markets are not yet recognized directly, Mergent can supplement coverage for OTCQX companies in up to four additional jurisdictions (Massachusetts, the District of Columbia, Nevada, and New Hampshire), depending on the issuer’s profile. The progress is real, and our own (OTCQX:OTCM) shares are now Blue Sky compliant in all 50 states, the District of Columbia and two U.S. territories. Our legal team has achieved this broad coverage through market qualification, manuals and individual state filings. We are hopeful that we can achieve 100% compliance in in the near future and provide a roadmap for other OTCQX companies to achieve national coverage.
Blue Sky Laws remains a complicated patchwork, which reflects differing approaches to securities regulation among the states. While some jurisdictions focus on the availability of issuer disclosure, others apply merit or qualification-based standards that permit substantive review of an offering or security. In these merit-review jurisdictions, disclosure-based standards are often insufficient to achieve recognition. The result is that no amount of state-by-state recognition could make 54 separate regimes operate like one national market. That is why the SEC is stepping in to provide one reporting regime for companies who are registered at the federal level.
What the SEC is proposing, and who it reaches
Under Release No. 33-11418, an SEC-registered offering would be preempted from state Blue Sky registration and qualification, including registered offerings of securities that are not listed on a national exchange. The secondary trading that follows should be preempted as well, as long as the company stays current in its Securities Exchange Act reports. This needs to be clarified in the final rule set.
Here is what that looks like in practice. Consider a company on the OTCQB Venture Market that wants to raise capital through a registered offering and has prospective investors across many states. Today, in addition to registering the offering with the SEC, the company may need to register or qualify its offering in each state where it expects to sell, or confirm that a state exemption applies. That adds legal cost and can add weeks to the timeline. Under the proposal, the SEC-registered offering would not require that state-by-state step. After the offering, as long as it keeps its Exchange Act periodic reports current, secondary trading in its shares should be preempted as well.
Figure 1. How Blue Sky treatment of an SEC-registered OTC security would change under Release No. 33-11418.
Two limits are worth understanding. First, the relief is tied to SEC registration and continued Exchange Act reporting, so it reaches companies inside the federal reporting system most directly. Most international companies and certain U.S. companies on OTCQX and OTCQB are exempt from SEC registration and would not benefit from the proposed preemption. Second, securities sold under Regulation A Tier 2 are currently preempted at the offering level, but secondary sales in those securities are not automatically preempted.
What it means for issuers
The practical benefit is lower costs, faster access to capital, and fewer regulatory hurdles. A registered offering would clear one federal standard rather than a stack of state filings, and the secondary market in a stock would face fewer state-level barriers as long as it stays current in its SEC reporting. This extends to SEC-reporting, OTC-traded issuers, which should be granted the same status that exchange-listed companies have had for decades. The most important thing an issuer can do is keep their company disclosure timely and complete.
Issuers can also stay up to date on their own Blue Sky status. Through the OTCIQ® platform, an issuer can see the same Blue Sky compliance status that broker-dealers and clearing firms see, state by state, and identify where its securities are recognized and where they are not. OTC Markets provides guidance on expanding that coverage using the manual exemption and other available state exemptions. Maximizing Blue Sky compliance widens the universe of brokers and investors that can engage with a stock now, and positions the company well if a federal standard takes effect later.
What it means for broker-dealers
The proposal points toward less friction at the point of trade. Today, before recommending an OTCQX or OTCQB security to a retail customer, a broker has to first confirm which state the customer sits in and which exemption applies. Preemption tied to current Exchange Act reporting would further reduce the compliance steps for the securities the rule touches.
The bigger change is in what becomes possible beyond a single trade. The proposal would substantially reduce the Blue Sky barriers that limit broker recommendations, inclusion in managed accounts, and the distribution of research. Investment professionals would have more room to recommend an eligible security, hold it in a managed account, and publish research on it across states. For brokers, that broader access is where the proposal matters most. It widens engagement, deepens liquidity, and lets them serve more customers in more places with less overhead.
What it means for investors
Greater access is the whole point. Blue Sky rules today can decide whether a broker can recommend or solicit a given OTCQX or OTCQB security to an investor in one state, while an investor one state over faces no such limit. Access to the same SEC-reporting company can end up depending less on the quality of its disclosure than on the investor’s zip code. The proposal would smooth out those state-by-state differences for companies that stay current in their SEC reporting. Investors would gain more consistent access to eligible securities, more research to inform their decisions, and the ability to hold those securities in managed accounts wherever they live. The result is a more level playing field, where sound disclosure rather than geography decides an investor’s access to a security.
What happens next
The comment period on Release No. 33-11418 closed on July 27, 2026. The Commission has been reviewing the comments and will decide whether to adopt a final rule, and on what terms. State securities regulators, through the North American Securities Administrators Association, have long defended their role in reviewing secondary trading and may oppose broader preemption. The SEC’s proposal keeps state antifraud authority intact, which is the tool regulators use to pursue fraud, making the debate about registration and review rather than enforcement.
OTC Markets filed a comment letter on July 17, 2026, supporting the proposed preemption of all SEC-registered offerings. The letter also asks the Commission to extend preemption to secondary trading in two categories: securities issued in Regulation A Tier 2 offerings, and eligible OTCQX securities, including those of non-SEC-reporting companied that provide current public disclosure consistent with Rule 15c2-11. Our letter and all other submissions are available on the SEC’s website under File No. S7-2026-17. Issuers, broker-dealers, investment advisors, and investors who trade in OTC securities can weigh in even after the comment period.
Our position on this proposal is consistent with the principles OTC Markets has championed for decades, and it reflects our longstanding commitment to expanding investor access and lowering unnecessary regulatory barriers. We are proud to have earned Blue Sky recognition in 41 states. Even so, investors and market participants would be better served by a single national framework than by a patchwork of state-by-state rules. The SEC now has its clearest opportunity in a generation to set a national standard that rewards transparency, widens investor access, and strengthens liquidity for companies that choose to operate within the federal reporting system.
This post is for educational purposes and describes a proposed SEC rulemaking that is open for public comment. It is not legal, financial, or investment advice. Companies and broker-dealers evaluating how Blue Sky preemption would apply to their securities or their trading activity should consult qualified counsel.
Read our previous blog: At-the-Market Offerings, Explained: What the SEC’s Proposal Means for Companies on OTCQX and OTCQB
Additional Resources:
SEC Release No. 33-11418 (proposed rule)
SEC: Covered Securities Pursuant to Section 18 of the Securities Act of 1933
National Securities Markets Improvement Act of 1996 (Public Law 104-290)
OTC Markets: Understanding Blue Sky Laws
OTC Markets: Blue Sky Compliance Data, Exemption Types and Data Transparency
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