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 bonds are used in the context of securities regulation, particularly in regard to the sale of securities. When a dealer or salesperson is conducting securities transactions, they may be required to post a blue sky bond as a form of financial assurance to the state.

This bond acts as a safety net for investors, providing a means for them to recover some of their losses in the event that the dealer defaults on their obligations—whether due to fraud, insolvency, or other financial failures. By requiring a blue sky bond, states aim to increase investor confidence and ensure a measure of protection against unscrupulous practices in the securities market.

Understanding the role of blue sky bonds emphasizes the importance of investor protection in securities regulation, ensuring that there are mechanisms in place to mitigate risks associated with financial transactions and investments.