What is the primary function of a blue sky bond?

The primary function of a blue sky bond is to protect investors from dealer defaults. Blue sky laws are state-level regulations designed to protect investors by regulating the offering and sale of securities. A blue sky bond acts as a form of insurance that assures investors they will receive compensation in the event that a registered dealer defaults on their obligations related to the sale of securities. This is crucial in maintaining investor confidence and helping to ensure a fair and transparent securities market.

By providing a financial safety net, blue sky bonds help mitigate the risks associated with investing in securities, thereby encouraging investment and contributing to market stability. The presence of a blue sky bond can also signify that the dealer or security offering has met specific standards and compliance requirements, which can further promote investor trust.