AS Goldmen & Co Inc v. NJ Bureau Securities

Opinions of the United

1999 Decisions States Court of Appeals

for the Third Circuit

1-7-1999

AS Goldmen & Co Inc v. NJ Bureau Securities

Precedential or Non-Precedential:

Docket 97-5618

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Filed January 7, 1999

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 97-5618

A.S. GOLDMEN & COMPANY, INC.

v.

NEW JERSEY BUREAU OF SECURITIES,

Appellant

On Appeal from the United States District Court

for the District of New Jersey

(D.C. Civil No. 96-cv-05280)

District Judge: Honorable Dickinson R. Debevoise

Argued Thursday, May 21, 1998

BEFORE: ROTH1, McKEE and GARTH, Circuit Judges

Reargued Friday, December 4, 1998

BEFORE: ALITO, McKEE and GARTH, Circuit Judges

(Opinion filed January 7, 1999)

_________________________________________________________________

1. Judge Roth was obliged to recuse herself after argument but before

clearance of this Opinion. Judge Alito took Judge Roth's place upon

reconstitution of the panel and reargument.

Peter Verniero, Attorney General

Office of the Attorney General of

New Jersey

Andrea M. Silkowitz, Assistant

Attorney General

Division of Law

Hughes Justice Complex

CN-112

Trenton, New Jersey 08625

Gail M. Cookson (argued)

Deputy Attorney General

Tracy Thayer

Deputy Attorney General

Office of the Attorney General of

New Jersey

124 Halsey Street

P.O. Box 45029

Newark, New Jersey 07101

Attorneys for Appellant

New Jersey Bureau of Securities

Martin Flumenbaum (argued)

Brad S. Karp

Paul, Weiss, Rifkind, Wharton &

Garrison

1285 Avenue of the Americas

New York, New York 10019-6064

Michael A. Lampert

Saul, Ewing, Remick & Saul

214 Carnegie Center, Suite 202

Princeton, New Jersey 08540

Attorneys for Appellee

A.S. Goldmen & Company, Inc.

2

Karen M. O'Brien, General Counsel

North American Securities

Administrators Association, Inc.

10 G Street, NE

Suite 710

Washington, D.C. 20002

Attorneys for Amicus-Appellant

North American Securities

Administrators Association, Inc.

Richard E. Walker

Eric Summergrad

Luise de la Torre

Paul Gonson

Securities & Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Attorneys for Amicus-Appellant

Securities & Exchange Commission

OPINION OF THE COURT

GARTH, Circuit Judge:

This case raises a dormant commerce clause challenge to

one aspect of the New Jersey Uniform Securities Law. The

appellee, A.S. Goldmen & Co., Inc. ("Goldmen"), claims that

N.J.S.A. S 49:3-60 ("S 60") violates the dormant commerce

clause insofar as it authorizes the appellant New Jersey

Bureau of Securities to prevent Goldmen from selling

securities from New Jersey to buyers in other states where

purchase of the securities was authorized by state

regulators. The district court agreed, and granted summary

judgment in favor of Goldmen. We hold that S 60 does not

run afoul of the dormant commerce clause, and therefore

reverse.

3

I.

A.

Because of the noted potential for fraud and deception in

the buying and selling of securities, securities markets are

among the most heavily regulated markets in the United

States.2 Regulation of securities first flourished at the state

level in the 1910s, when states began enacting laws that

required the registration of a securities offering before the

sale of the security was permitted. The purpose of these so-

called "blue sky" laws was to allow state authorities to

prevent unknowing buyers from being defrauded into

buying securities that appeared valuable but in fact were

worthless.3 By 1933, all but one state had passed blue sky

laws; today, all fifty states, the District of Columbia, Guam,

and Puerto Rico have blue sky laws in force. See Louis Loss

& Joel Seligman, 1 Securities Regulation 40-41 (3d ed. Rev.

1998) (hereinafter, "Loss & Seligman").

Aggressive federal regulation of securities markets began

in the early 1930s with the passage of the Securities Act of

1933 and the Securities Exchange Act of 1934. Today, the

Securities and Exchange Commission ("SEC") administers

these and five other federal statutes, which altogether form

a complex web of federal regulations. See id. at 224-81.

Despite this complex federal scheme, Congress, the courts,

and the SEC have made explicit that federal regulation was

not designed to displace state blue sky laws that regulate

interstate securities transactions. See, e.g., 15 U.S.C.

S 77r(c) (1997) (preserving state jurisdiction "to investigate

and bring enforcement actions with respect to . . . unlawful

conduct by a broker or dealer") (National Securities Markets

Improvement Act of 1996); Merrill Lynch, Pierce, Fenner &

Smith, Inc. v. Ware, 414 U.S. 117, 137 (1973) ("Congress

_________________________________________________________________

2. Securities are the collective term used to describe documents that

represent ownership in a company or a debt. Common examples include

stocks, bonds, notes, convertible debentures, and warrants. See Black's

Law Dictionary 1215 (5th ed. 1979); Joseph C. Long, 12 Blue Sky Law

S 2.01 (1997).

3. See generally Jonathan R. Macey & Geoffrey P. Miller, Origin of the

Blue Sky Laws, 70 Tex. L. Rev. 347 (1991).

4

intended to subject [securities] exchanges to state

regulation that is not inconsistent with the federal [laws].");

Loss & Seligman at 275-281. Although the enactment of

the National Securities Markets Improvement Act of 1996

narrowed the role of state blue sky laws by expanding the

range of federal preemption, federal and state regulations

each continue to play a vital role in eliminating securities

fraud and abuse. See Loss & Seligman at 60-62; Manning

G. Warren III, Reflections on Dual Regulation of Securities

Regulation: A Case Against Preemption, 25 B.C. L. Rev. 495,

497, 501-27 (1984) (describing how Congress, the courts,

and the SEC have expressly authorized the enforcement of

state blue sky laws).

B.

Among blue sky laws, the most common regulatory

approach is the mixed disclosure and merit regulation

scheme offered by the Uniform Securities Act ("Uniform Act").4

Drafted in large part by the late Professor Louis Loss, the

Uniform Act has been adopted with some modification in

nearly forty states, including New Jersey. See N.J.S.A.

S 49:3-47 to 76. The Act contains three essential parts:

provisions requiring the registrations of securities sold

within the state; provisions requiring the registration of

persons involved in the securities industry; and various

antifraud provisions. See id; see also Joseph C. Long, 12

Blue Sky Law S 1.07 (1997) (hereinafter, "Long").

This case raises a constitutional challenge to N.J.S.A.

S 49:3-60 ("S 60"), which is New Jersey's codification of the

portion of the Uniform Act that makes it "unlawful for any

security to be offered or sold in this State" unless the

security is either registered by state authorities, is exempt

_________________________________________________________________

4. The various state and federal securities regulations reflect two broad

regulatory philosophies: merit regulation and disclosure. Regulations

based on disclosure principles, such as the federal Securities Act of

1933, seek to provide investors with all material and relevant

information about the securities and the company offering them. In

contrast, merit regulations seek to protect investors by prohibiting

transactions that authorities deem unfair or unjust. See Joseph C. Long,

12 Blue Sky Law S 1.05 (1997).

5

under N.J.S.A. S 49:3-50, or is a federally covered security.5

When read in conjunction with N.J.S.A. S 49:3-51(c), which

states that "an offer to sell or buy is made in this State . . .

when the offer . . . originates in this State," S 60 grants New

Jersey regulatory authorities the power to regulate the offer

or sale of all non-exempt, non-covered securities whenever

the offer is made within the state of New Jersey. Under

N.J.S.A. S 49:3-64 and the 1985 amendments to the New

Jersey statute, this authority permits the chief of the New

Jersey Bureau of Securities ("Bureau") to exercise broad

powers to regulate sale of such securities in New Jersey

when it is deemed in the public interest and various

statutory requirements have been met.

II.

A.

A.S. Goldmen & Co. is a securities broker-dealer with its

sole office located in Iselin, New Jersey.6 At the time of

proceedings before the District Court, Goldmen's sole office

was located in New Jersey. Since that time, it has opened

at least one other office out of state.

Goldmen specializes in underwriting the public offerings

of low priced, over-the-counter securities, and then selling

those securities in the secondary market. During thefirst

several months of 1996, Goldmen planned the initial public

_________________________________________________________________

5. In its current form, N.J.S.A. S 49:3-60 (1997) states:

It is unlawful for any security to be offered or sold in this State

unless:

(a) The security or transaction is exempt under section 3 of

P.L.1967, c. 93 (C.49:3-50);

. . .

(e) The security is registered under this act; or

(f) It is a federal covered security for which a notice filing and

fees

have been submitted as required by section 14 of this act (C.49:3-

60.1).

6. A "broker-dealer" is defined by the Act as "any person engaged in the

business of effecting or attempting to effect transactions in securities

for

the accounts of others or for his own account." N.J.S.A. S 49:3-49(c).

6

offering of Imatec, Ltd. ("Imatec"). Imatec is a Delaware

corporation, located in New York, that was formed in 1988

to develop, design, market, and license image enhancement

technologies. Goldmen planned for the Imatec securities to

be traded as a NASDAQ Small Cap stock because such

stocks are exempt from initial federal registration

requirements, see 15 U.S.C. S 77(d) (1997). The primary

regulation of the Imatec security during the first 25

calendar days of the offering would occur at the state level.

See 17 C.F.R. S 230.174(d) (1992). Accordingly, in May

1996, Goldmen concurrently filed registration statements

with the SEC, and also attempted to register the offering

"by qualification" with state regulatory authorities in over a

dozen states, including New Jersey.7

The prospectus filed by Goldmen with the New Jersey

Bureau of Securities ("the Bureau") listed Goldmen as the

sole underwriter, and also indicated that Goldmen would

own the shares to be offered to the public. Reviewing

Goldmen's application, the Bureau expressed various

concerns regarding the Imatec offering to Goldmen's

counsel. Although the Bureau was not prepared to make

allegations of fraud, it had already been investigating

Goldmen's business practices at that time, and was

concerned that the combination of Goldmen's practices and

the bleak financial prospects of Imatec made the offering a

high-risk investment that was likely to be associated with

abusive and manipulative sales practices.

On August 7, 1996, the Bureau informed Goldmen's

counsel that it was considering the issuance of a stop order

that would block the Imatec offering from being registered

in New Jersey. Goldmen's counsel and the Bureau then

entered into negotiations concerning the future of the

Imatec offering. On October 23, 1996, these negotiations

_________________________________________________________________

7. Registration "by qualification" is the most comprehensive form of blue

sky registration, and is generally necessary when the security is exempt

from initial federal registration requirements. The other types of

registration, registration "by notification" and registration "by

coordination," are much simpler and are reserved for securities that

carry a higher indicia of reliability than securities that must be

registered by qualification. See N.J.S.A.S 49:3-61 (describing

requirements for registration by qualification).

7

resulted in a Consent Order signed by the CEO of Imatec

and the Bureau chief. According to the Consent Order,

Goldmen withdrew its application to register the Imatec

offering in New Jersey, and agreed that the Imatec offering

did not qualify for N.J.S.A. S 49:3-50(b) exemptions to the

registration rule of S 60. Goldmen was permitted to make

unsolicited sales from New Jersey or to sell to certain

financial institutions or to other broker-dealers. However,

the Consent Order specifically denied Goldmen exemptions

that would have allowed it to solicit members of the public

to purchase Imatec stock in the secondary market. App.

38-41; App. 156-57.

Five days after Goldmen entered into the Consent Order,

on October 28, 1996, the registration statement that

Goldmen had filed with the SEC became effective. 8 As of

that date, Goldmen had managed to register the Imatec

offering in sixteen states, but had been forced to withdraw

its registration in several others, including New Jersey.

On the morning of October 29, 1996, Goldmen

commenced the initial public offering from its office in

Iselin, New Jersey. By telephone, Goldmen solicited sales to

individuals outside of New Jersey, but did not solicit any

sales to individuals within New Jersey. By 3 p.m. of that

day, Goldmen had sold the entire public offering. 9

Subsequently, Goldmen continued to buy and sell Imatec

securities in the interdealer market from its New Jersey

office.

_________________________________________________________________

8. Registration with the SEC does not imply SEC approval of the offering.

See 15 U.S.C. S 77w (1997) ("[T]he fact that the registration statement

for

a security has been filed or is in effect . . . shall [not] be deemed a

finding by the Commission that the registration statement is true and

accurate on its face . . . , or be held to mean that the Commission has

in any way passed upon the merits of, or given approval to, such

security.")

9. We do not regard this case as moot despite the fact that the Imatec

offerings are concluded. We are concerned that this kind of case

presents a problem that may be capable of repetition but avoiding review

with respect to Goldmen. Weinstein v. Bradford, 423 U.S. 147 (1975).

Due to the nature of Goldmen's business, this same problem may be

confronted in the future.

8

The Bureau learned of Goldmen's sales on November 7,

1996. Because the window for state regulation of the

Imatec offering closed 25 days after the offering began,10 the

Bureau acted immediately, notifying Goldmen that it

believed that the sales violated the Securities Act and the

Consent Order. Goldmen took the position that its sales

violated neither state law nor the consent order, and

informed the Bureau that it intended to continue to buy

and sell securities from its New Jersey office. The Bureau

responded by issuing a Cease and Desist Order dated

November 12, 1996, which ordered Goldmen to "cease and

desist from the solicitation of customers, offer and sale of

Imatec in or from the State of New Jersey to any members

of the public." App. 91.

B.

On the same day that the Bureau issued the Cease and

Desist Order, Goldmen filed this declaratory judgment

action against the Bureau in federal district court.

Goldmen's complaint claimed that "the New Jersey

Securities Act, as applied to securities that were not

registered or exempt from registration in New Jersey and

were sold by brokers located in New Jersey to residents of

states (other than New Jersey) in which the securities were

qualified for sale, violates the Commerce Clause of the

United States Constitution." The complaint also alleged that

even if the Securities Act was constitutional, the Act and

the Consent Order did not apply to block Goldmen's sales

of Imatec securities from New Jersey. According to

Goldmen, the sole legal effect of the Act and the Consent

Order was to prohibit Goldmen from selling the securities

to buyers located in New Jersey.

The district court issued an Order to Show Cause, and

held a hearing on November 20, 1996.11 The district court

_________________________________________________________________

10. Under 15 U.S.C. S 77r(b)(4)(A) and 17 C.F.R. S 230.174(d), the Imatec

security became a "covered security" 25 days after the initial public

offering. At that time, state regulation was preempted. See 15 U.S.C.

S 77r(a)(1)(A) (1997).

11. At the hearing, the Bureau argued that Goldmen's federal action

should be stayed under the abstention principles enunciated in Younger

9

issued a preliminary injunction the same day, enjoining the

Bureau from taking any action that would prohibit

Goldmen from "soliciting, offering or selling securities that

are not registered or exempt from registration in New Jersey

to residents of states (other than New Jersey) in which the

securities are qualified for sale." App. 402-03.

The case then proceeded to cross-motions for summary

judgment. On August 21, 1997, the district court granted

Goldmen's motion for summary judgment and denied the

Bureau's summary judgment motion. The sole issue

addressed was whether the New Jersey Uniform Securities

Law violated the dormant commerce clause by authorizing

the Bureau to block the sale of securities from New Jersey

to buyers in other states where the security was registered.

The district court concluded that it did. According to the

district court, the law directly regulated interstate

commerce because it effectively allowed the Bureau"to

impose New Jersey securities regulations onto other states."

The district court argued that "[t]o allow the Bureau to

preclude consumers in other states from receiving

solicitations to purchase securities which their own state

regulators have deemed appropriate for purchase is, in

essence, to allow the Bureau to substitute its own

regulatory judgment for that of other states." Further, the

district court argued that absent allegations of fraud, the

Bureau had no interest in regulating such transaction.

Accordingly, the New Jersey Uniform Securities Law

imposed an excessive burden on interstate commerce in

relation to New Jersey's local benefits. App. 581 (citing Pike

v. Bruce Church, 397 U.S. 137 (1970)).

The Bureau filed a timely appeal.

_________________________________________________________________

v. Harris, 401 U.S. 37, 91 S. Ct. 746 (1971). The district court rejected

this argument. App. 446. Because the Bureau has chosen not to raise

this issue on appeal, we will not address it further. Compare Ohio Bureau

of Employment Services v. Hodory, 431 U.S. 471, 477-80, 97 S.Ct. 1898,

1904 (1977).

10

III.

A. Legal Framework

The Supreme Court has long construed the Commerce

Clause as implying a judicial power to invalidate state laws

that interfere improperly with interstate commerce. See,

e.g., Cooley v. Board of Wardens, 53 U.S. (12 How.) 299

(1851). One consistent strain of these cases authorizes

courts to invalidate state regulations when their

extraterritorial impact is so great that their "practical effect

. . . is to control conduct beyond the boundaries of the

state." Healy v. The Beer Institute, 491 U.S. 324, 336, 109

S.Ct. 2491, 2499 (1989). As Justice Cardozo explained in

Baldwin v. G.A.F. Seelig, 294 U.S. 511, 523, 55 S.Ct. 497,

500 (1935), such a power is necessary to prevent states

from applying "parochial" laws that can bring about "a

speedy end of our national solidarity." "The Constitution,"

Justice Cardozo stated, "was framed upon the theory that

the peoples of the several states must sink or swim

together, and that in the long run prosperity and salvation

are in union and not division." Id.

According to these "extraterritorial effects" cases, a state

may not attempt to regulate commerce that takes place

"wholly outside" of its borders: such a "projection of one

state regulatory regime into the jurisdiction of another

State" is impermissible. Healy, 491 U.S. at 336-37; 109

S. Ct. at 2499. Under this rubric, the Supreme Court has

invalidated state laws that restricted interstate movement of

goods based on the price paid for them in out-of-state

transactions. See, e.g., Baldwin, 294 U.S. at 521, 55 S. Ct.

at 499 (invalidating New York law that banned the

importation of milk into New York when the price paid

outside of New York to the out-of-state producer was lower

than that permitted under then-existing laws regulating

milk purchases from New York producers); Lemke v.

Farmers Grain Co., 258 U.S. 50, 61, 42 S. Ct. 244, 248

(1922) (invalidating North Dakota law requiring exported

wheat to be sold outside of North Dakota at price set by

North Dakota state inspector). Similarly, the Court has

struck down state laws that prohibited the importation of

out-of-state goods unless the importer guaranteed that its

11

in-state prices were no higher than elsewhere. See, e.g.,

Healy, 491 U.S. at 337, 109 S. Ct. at 2499 (invalidating

Connecticut law prohibiting beer imports unless seller

guaranteed that prices offered in Connecticut were no

higher than in neighboring states); Brown-Forman Distillers

Corp. v. New York State Liquor Auth., 476 U.S. 573, 579,

106 S. Ct. 2080, 2084 (1986) (invalidating New York law

requiring liquor importers to affirm that prices offered to

New York wholesalers were lowest nationwide). Finally, the

Court has invalidated laws granting officials in one state

the authority to block multistate transactions that only

marginally involve in-state interests. See Edgar v. MITE

Corp., 457 U.S. 624, 643-46, 102 S. Ct. 2629, 2641-42

(1982) (invalidating Illinois law that authorized Illinois

officials to block substantively unfair takeovers of

multistate companies that had connections to Illinois and

also other states).

Of course, these cases do not establish that the states

are forbidden categorically to regulate transactions that

involve interstate commerce. See H.P. Hood & Sons v. Du

Mond, 336 U.S. 525, 532-33, 69 S. Ct. 657, 662 (1949)

(Jackson, J.) (recognizing that States have "broad power . . .

to protect its inhabitants against . . . fraudulent traders . . .

even by use of measures which bear adversely upon

interstate commerce"). Rather, states are permitted to

regulate in-state components of interstate transactions so

long as the regulation furthers legitimate in-state interests.

A particularly relevant example of this is Hall v. Geiger-

Jones Co., 242 U.S. 539, 37 S. Ct. 217 (1917), and its

companion cases, Caldwell v. Sioux Falls Stock Yards Co.,

242 U.S. 559, 37 S.Ct. 224 (1917) and Merrick v. N.W.

Halsey & Co., 242 U.S. 568, 37 S.Ct. 227 (1917)

(collectively, the "Blue Sky Cases"). In the Blue Sky Cases,

the Court considered dormant commerce clause challenges

to then-recently enacted Blue Sky laws in Ohio, South

Dakota, and Michigan. Although the three statutes differed

somewhat, each granted state securities commissions the

authority to block the in-state sale or purchase of

unlicensed securities. The laws were challenged both by

unlicensed in-state securities sellers and the out-of-state

purchasers who had traveled in-state to make their

purchases, but the Court rejected their claims that the laws

12

violated the dormant commerce clause. The key to the laws'

constitutionality, the Court held, was that "[t]he provisions

of the law . . . apply to dispositions of securities within the

state." Hall, 242 U.S. at 557, 37 S. Ct. at 223 (emphasis in

original). By limiting the scope of the statute to dispositions

of securities "within the State," the Court announced, the

states had merely enacted "police regulation[s]," that

"affect[ed] interstate commerce . . . only incidentally." Id. at

558, 37 S. Ct. at 223; see also CTS Corp. v. Dynamics

Corp., 481 U.S. 69, 93, 107 S.Ct. 1637, 1651-52 (1987)

(rejecting challenge by out-of-state company to Indiana law

conditioning acquisition of corporate control of Indiana

corporation on approval of a majority of the pre-existing

disinterested shareholders, reasoning that law regulated in-

state corporations); cf. Shafer v. Farmers' Grain Co, 268

U.S. 189, 200, 45 S. Ct. 481, 485 (1925) (invalidating North

Dakota law that regulated in-state handling of wheat

headed for interstate commerce that served no legitimate

in-state interests).

B. Territoriality

As these cases indicate, the constitutionality of state

regulations of interstate commerce depends largely on the

territorial scope of the transaction that the state law seeks

to regulate. If the transaction to be regulated occurs "wholly

outside" the boundaries of the state, the regulation is

unconstitutional. MITE Corp, 457 U.S. at 642. If the

transaction occurs "within" the boundaries of the state, it is

constitutional so long as the regulation furthers legitimate

in-state interests. See id. at 643-46; CTS Corp, 481 U.S. at

93.

Therefore, the first issue we must address is the

territorial scope of the transaction that New Jersey has

attempted to regulate. The question is, what is the

territorial basis of a contract entered into by telephone

between a New Jersey broker soliciting sales of Imatec

securities from New Jersey, and an out-of-state buyer who

agrees to purchase them outside of New Jersey? More

particularly, can it fairly be said that such a transaction

occurs "wholly outside" New Jersey? As this is a legal

question, our review is plenary. See Ciarlante v. Brown &

13

Williamson Tobacco Corp., 143 F.3d 139, 145 (3d Cir.

1998).

Goldmen and the Bureau offer divergent views ofS 60's

territorial scope. Goldmen argues that S 60 permits New

Jersey to reach out beyond its borders and block willing

buyers from completing transactions authorized by their

home states. According to Goldmen, "the effects of the

Bureau's application of Section 60 is not to regulate in-

state brokers, but to preclude out-of-state residents from

purchasing a product deemed appropriate for sale by their

own regulators." Br. at 20. Goldmen suggests that the

offer's origin in New Jersey is not relevant to the

transaction's territoriality, because "the `practical effect' of

permitting New Jersey to bar the sale of securities from

New Jersey into states where those securities have been

qualified for sale is that those out-of-state residents will be

precluded altogether from receiving the opportunity to

purchase these securities." Id. at 16.

The Bureau's position is that S 60 regulates the offering

of securities entirely within the state of New Jersey.

According to the Bureau,

Section 60 simply regulates how brokers located in

New Jersey conduct business from their New Jersey

offices. In this instance, these were Imatec securities

. . . offered for sale by the underwriter through

solicitations of the public from New Jersey. The offer

and sale arose in New Jersey. Goldmen chose to

domicile its highly-regulated business in New Jersey

and to conduct that business from within the State.

Br. at 27.12 The Bureau concedes that S 60 may affect

interstate commerce, to the extent that sellers such as

Goldmen try to sell securities to buyers in other states.

However, the Bureau contends that this is merely an

indirect effect of what is essentially New Jersey's regulation

of New Jersey parties seeking to sell securities in New

Jersey.

_________________________________________________________________

12. Both amici, North American Securities Aministrators Association and

the Securities and Exchange Commission, support the position taken by

the New Jersey Bureau of Securities that S 60 does not violate the

dormant commerce clause.

14

In resolving this question, we begin by noting that

notions of the territorial scope of contracts between citizens

of different states have evolved in the past century. At one

time, it was fashionable to conceive of contracts between

diverse parties as being rooted in a single geographical

location, such as the place the offer was accepted. See, e.g.,

Joseph H. Beale, What Law Governs Validity of a Contract,

23 Harv. L. Rev. 260, 270-71 (1910). Under this traditional

approach, it was believed that when a contract offer made

in New Jersey was accepted in New York, the contract was

"made" in New York, and thus implicated New York's

sovereignty. See id; cf. Perrin v. Pearlstein, 314 F.2d 863,

867 (2d Cir. 1963).

The contrasting modern approach is to recognize that

contracts formed between citizens in different states

implicate the regulatory interests of both states. Thus,

when an offer is made in one state and accepted in another,

we now recognize that elements of the transaction have

occurred in each state, and that both states have an

interest in regulating the terms and performance of the

contract. See, e.g., General Ceramics Inc. v. Fireman's Fund

Ins. Co., 66 F.3d 647, 656-59 (3d Cir. 1995) (comparing the

regulatory interests of New Jersey and Pennsylvania to a

contract formed between a New Jersey company and a

Pennsylvania company in the course of determining

applicable law). See generally Joseph W. Singer, A

Pragmatic Guide to Conflicts, 70 B.U. L. Rev. 731, 785-802

(1990) (describing the regulatory interests of states in

contract disputes between diverse parties).

This notion that the sovereignty of both the state of the

offeror and offeree are implicated by contracts entered into

by citizens in different states is the key to understanding

the territorial scope of the contract between Goldmen and

the prospective buyers of Imatec in another state such as

New York. A contract between Goldmen in New Jersey and

a buyer in New York does not occur "wholly outside" New

Jersey, just as it does not occur "wholly outside" New York.

Rather, elements of the transaction occur in each state,

15

and each state has an interest in regulating the aspect of

the transaction that occurs within its boundaries.13

Accordingly, S 60 simply allows the Bureau to regulate its

"half" of the transaction-- the offer that occurs entirely

within the state of New Jersey-- and thus its territorial

scope is indistiguishable from that in Hall v. Geiger-Jones

Co., 242 U.S. 539, 37 S. Ct. 217 (1917), Caldwell v. Sioux

Falls Stock Yards Co., 242 U.S. 559, 37 S.Ct. 224 (1917)

and Merrick v. N.W. Halsey & Co., 242 U.S. 568, 37 S.Ct.

227 (1917).

Viewed in this light, Goldmen's view that S 60 violates the

dormant commerce clause because it projects its ban into

jurisdictions that would allow the transaction is logically

flawed and simply proves too much. If New Jersey seeks to

block Goldmen's offering but the buyer's state (say, New

York) would allow it, one state must prevail. One state can

in effect "force its judgment" upon the other. Under New

Jersey's Blue Sky law, New Jersey can block the

transaction even if New York would permit it.

Goldmen's alternative is no better, however: under its

view of the dormant commerce clause, New York's approval

would permit the transaction, over New Jersey's objection.

Thus, the difference between New Jersey's Blue Sky law

and Goldmen's proposal is simply the market's default rule:

should the transaction be allowed if either state permits, or

blocked if either side objects? Such questions of the

market's "structure" and its "method of operation" are quite

simply beyond the concern of the Commerce Clause, as

they "relate to the wisdom of the statute, not to its burden

on commerce." Exxon Corp. v. Governor of Maryland, 437

U.S. 117, 127-28 (1978).

C. Legitimate Interests

Having concluded that S 60 regulates the in-state

component of an interstate transaction, we next consider

whether the statute reasonably furthers a "legitimate

interest" within the boundaries of New Jersey. MITE Corp.,

_________________________________________________________________

13. A discussion of New Jersey's interests in this transaction appears in

subsection C.

16

457 U.S. at 644, 102 S. Ct. at 2641; CTS Corp., 481 U.S. at

93, 107 S. Ct. at 1651-52.

Goldmen claims that New Jersey has no legitimate

interest in regulating Goldmen's non-fraudulent sales to

out-of-state residents. If Goldmen's business practices are

manipulative, Goldmen argues, the harm will be suffered

entirely by out-of-state consumers. Br. at 29. Because the

protection of out-of-state consumers from potentially

manipulative sales practices is not New Jersey's legitimate

concern, Goldmen contends, its regulation of Goldmen's

non-fraudulent sales to out-of-state consumers does not

implicate any legitimate regulatory interests within the

state of New Jersey.

The Bureau responds by arguing that its regulation of in-

state sales of securities to out-of-state purchasers furthers

important New Jersey interests. We agree. In particular, we

consider two legitimate state interests to be particularly

strong ones. First, preventing New Jersey companies from

offering suspect securities to out-of-state buyers helps

preserve the reputation of New Jersey's legitimate securities

issuers. States that have failed to monitor out-of-state sales

by in-state broker-dealers have suffered in the past, as

their legitimate broker-dealers suffered from association

with suspect firms offering questionable securities. See

Long, S 3.04[3][a] at 3-51 to 3-52 (providing examples); see

also Stevens v. Wrigley Pharma. Co., 154 A. 403, 403 (N.J.

Ch. Div. 1931) (noting that New Jersey's interest in

regulating in-state offers to out-of-state buyers is"not so

much to protect the citizens of other states, as to prevent

this state from being used as a base of operations for

crooks marauding outside the state."); Simms Inv. Co. v.

E.F. Hutton & Co., 699 F. Supp. 543, 545 (M.D.N.C. 1988)

("[T]he laws protect legitimate resident issuers by exposing

illegitimate resident issuers."). Although this state interest

is heightened when the state can prove that the in-state

firm has engaged in outright fraud, the interest is

nonetheless legitimate when the state seeks to block sales

of securities that it believes might be associated with

dubious or manipulative sales practices. The difference

between a state's (i.e., New Jersey's) interest in preventing

fraud and preventing questionable practices is a difference

in degree, not a difference in kind.

17

The dissent contends that absent proof of actual fraud,

New Jersey has an insufficient interest in regulating

securities dealers who sell to out-of-state buyers. It is

undisputed that the purpose of securities registration laws

is to prevent fraud before it happens, and S 60 serves such

a prophylactic purpose. Merrick v. N.W. Halsey & Co., 242

U.S. 568, 587 (1917);14 Caldwell v. Sioux Falls Stock Yards

Co., 242 U.S. 559, 564 (1917) (upholding Blue Sky Law

designed "to prevent fraud in the sale and disposition of

stocks, bonds or other securities sold or offered for sale

within the state"); Hall v. Geiger-Jones Co., 242 U.S. 539,

551 (1917) (upholding Blue Sky Law designed to "prevent

deception and save credulity and ignorance from

imposition"); Cola v. Terzano, 322 A.2d 195, 198 (N.J.

Super. Ct. Law Div. 1974) (providing that the New Jersey

Uniform Securities Law is intended to protect the

uninitiated and to prevent frauds upon the public at large),

aff'd sub nom. Cola v. Packer, 383 A.2d 460 (N.J. Super. Ct.

App. Div. 1974); New Jersey v. Russell, 291 A.2d 583, 587

(N.J. Super. Ct. App. Div. 1972) (recognizing that the sale

of securities is a specialized field of activity in which the

potential for abuse and financial injury is great); Enntex Oil

& Gas Co. (of Nevada) v. Texas, 560 S.W.2d 494 (Tex. Civ.

App. 1977, writ ref'd n.r.e.), appeal dismissed for want of a

substantial federal question, 439 U.S. 961 (1978). New

Jersey's regulation of sales by in-state brokers to out-of-

state buyers serves the legitimate purpose of preventing

fraudulent transactions.

Regulating in-state offers to out-of-state buyers also

serves New Jersey interests by protecting New Jersey

residents from dubious securities that enter the state in the

secondary market. This risk is particularly great because a

_________________________________________________________________

14. [W]e think the [securities registration] statute under review is

within

the power of the state. It burdens honest business, it is true, but

burdens it only that under its forms dishonest business may not be

done. This manifestly cannot be accomplished by mere declaration;

there must be conditions imposed and provision made for their

performance. Expense may thereby be caused and inconvenience,

but to arrest the power of the state by such considerations would

make it impotent to discharge its function.

Id. at 587 (emphasis added).

18

broker-dealer such as Goldmen could otherwise delay or

even avoid the Bureau's scrutiny through an initial sale to

a cooperative party outside New Jersey. Because there is no

filing requirement for secondary transactions, Goldmen

could arrange to "sell" a security to a friendly out-of-state

party, immediately buy back the security, and then sell it

freely to New Jersey residents using possibly questionable

sales practices. App. 77-78.15 New Jersey's most effective

means of preventing such an undesirable result would be to

block the initial public offering. See Long, S 3.04[3][b-c] at

3-52 to 3-53.

In conclusion, the Bureau's application of S 60 to

Goldmen's Imatec offering furthers two legitimate state

interests: preserving the reputation of New Jersey broker-

dealers, and protecting New Jersey buyers in the secondary

market.

IV.

Because the Bureau's application of S 60 regulates the in-

state portion of an interstate transaction and furthers

legitimate in-state interests, the application ofS 60 to

regulate the Imatec offering does not violate the dormant

commerce clause. In so holding, we note that our

conclusion is in accordance with the overwhelming majority

of courts that have considered dormant commerce clause

challenges to blue sky laws. See, e.g., Hall, 242 U.S. at 557;

Enntex Oil & Gas Co. v. Texas, 560 S.W.2d 494 (Tex. Ct.

App. 1977), appeal dismissed for lack of a substantial

federal question, 439 U.S. 961 (1978); Chrysler Capital

Corp. v. Century Power Corp., 800 F. Supp. 1189, 1194

(S.D.N.Y. 1992); Upton v. Trinidad Petroleum Corp., 468 F.

Supp. 330, 336 (N.D.Ala. 1979), aff'd on other grounds, 652

F.2d 424 (5th Cir. 1981); Oil Resources v. Florida, 583 F.

Supp. 1027 (S.D.Fla. 1984), aff'd without op., 746 F.2d 814

(11th Cir. 1984); see also Loss & Seligman at 39-40 ("On

the whole, it seems fair to say that there no longer need be

_________________________________________________________________

15. Notably, there is evidence in the record that Goldmen had engaged in

such practices before. App. 196-98.

19

any substantial constitutional doubts about blue sky

provisions.").16

Indeed, the established heritage and near universality of

the provision that Goldmen has challenged itself

underscores its constitutionality. See Healy, 491 U.S. at

336-37, 109 S. Ct. at 2499. Goldmen has challenged a state

provision that is an established strand in the legal fabric of

securities regulation. The power that Goldmen claims would

unduly burden interstate commerce is one that most states

have long exercised, and that Congress has for decades

expressly allowed to continue. This is not the sort of

"parochial" state power that Justice Cardozo warned of in

Baldwin, the broad exercise of which "would .. . invite a

speedy end of our national solidarity." Baldwin, 294 U.S. at

523, 55 S.Ct. at 500.

We will therefore reverse the order of the district court

dated August 21, 1997, and remand for proceedings

consistent with this opinion.

_________________________________________________________________

16. Goldmen relies heavily on Arizona Corp. Comm'n v. Media Products,

Inc., 158 Ariz. 463, 763 P.2d 527 (Ariz. App. 1988), the one case that

runs counter to the many upholding state blue sky laws against dormant

commerce clause challenges. Media Products is distinguishable, however,

because in that case Arizona sought to bar an Arizona company from

selling a security outside of Arizona through an agent outside of Arizona

to a buyer who was also outside of Arizona. In other words, the only

connection the transaction had with Arizona was that the principal place

of business of the seller was located there. See id. at 464-65; 763 P.2d

at 528-29. ("Sales of the entire issue were negotiated out-of-state[,]

solely

by [an] out-of-state underwriter . . . . No sales or offers of sale were

made

in Arizona."). Because the offer and acceptance took place entirely

outside of Arizona, Arizona's attempt to block the transaction was not an

effort to regulate the in-state component of an interstate transaction, as

is the case here.

20

McKEE, Circuit Judge, dissenting.

I respectfully dissent from the opinion of my colleagues.

The majority recognizes New Jersey's right to regulate that

portion of a multi-state transaction occurring within its

borders because "one state must prevail" in a dispute that

extends beyond its borders and involves residents of other

states. Maj. Op. at 16. The approach the majority uses

would be helpful to resolving a choice of law dispute, but it

is of only limited assistance in adjudicating this dispute

under the Commerce Clause. New Jersey does not allege

that Goldmen's sale of Imatec stock involved fraud, and the

district court concluded that fraud was not involved. See

Dist. Ct. Op. at 7 ("The Bureau does not advance a single

allegation of fraud"). Thus, the issue is not which state will

win, but whether New Jersey's interest here is sufficient to

allow it to prevent Goldmen from soliciting residents of

other states. The district court concluded, "the Bureau is

reaching out to prohibit a sale, not made to New Jersey

residents, which takes place in a national securities

market, and which is regulated by each state to protect its

own citizens." Id. The district court concluded that New

Jersey's interest was not sufficient to allow that result. I

agree, and would affirm the well reasoned decision of the

district court.

I.

My colleagues cite General Ceramics Inc. v. Firemen's

Fund Ins. Co., 66 F.3d 647, 656-59 (3rd Cir.) to justify the

conclusion that New Jersey's interest in regulating offers

made from within its borders justifies preventing Goldmen

from offering shares of Imatec to buyers residing in states

where that security is properly registered. Maj. Op. at 15.

In Firemen's Fund, the issue was

whether New Jersey or Pennsylvania law controls the

interpretation of an exception to a pollution-exclusion

clause when New Jersey has significant contacts with

the insurance contract and the insured but

Pennsylvania is the site of the hazardous waste site

giving rise to the liability for which coverage is sought.

21

Id., at 649. The dispute arose in a diversity case where we

applied New Jersey's choice of law rules to determine if the

law of New Jersey or Pennsylvania governed the

interpretation of an exception to a pollution-exclusion

clause in a comprehensive liability insurance policy. The

loss that gave rise to the dispute resulted from costs

incurred under the Comprehensive Environmental

Response Compensation and Liability Act ("CERCLA"). Our

analysis focused upon which state's law controlled"whether

the phrase `sudden and accidental' extended coverage for

the gradual discharge of pollution." Id., at 652. We held

that New Jersey law applied. Id. ("Based on the strong

public policy that underlies New Jersey's broad

interpretation of the pollution-exclusion exception,. . . New

Jersey law governs."). We reached that result because the

interests of Pennsylvania would not have been furthered by

applying its law to that particular dispute, whereas the

interests of New Jersey were furthered by applying the law

of New Jersey. Id., at 657.

That does not assist us here. The controversy here is not

merely between the conflicting regulations of two or more

states. Rather, this dispute focuses upon the impact of that

conflict upon interstate commerce. Nor, do I believe that the

Blue Sky Cases1 support the majority's conclusion.

Although those cases do address the scope of the

restrictions imposed on states under the Commerce Clause,

they do not address the precise issue that Goldmen raises.

In Merrick, (one of the Blue Sky Cases) the Court did not

even address whether the Blue Sky Law at issue violated

the Commerce Clause. Instead, the Court reserved that

question for decision in Geiger-Jones v. Hall - a companion

case to Merrick. See Merrick, 242 U.S. at 590. In Hall, the

Court reviewed an Ohio law that required sellers of

securities to obtain a license before offering any securities

for sale within the state. An Ohio securities broker with

clients in several states including Ohio (Geiger-Jones)

brought a multi-faceted challenge to the legality of Ohio's

licensing requirement. The primary assertion was that

_________________________________________________________________

1. Hall v. Geiger-Jones Co., 242 U.S. 539, 37 S. Ct. 217 (1917), Caldwell

v. Sioux Falls Stock Yards Co., 242 U.S. 559, 37 S.Ct. 224 (1917) and

Merrick v. N.W. Halsey & Co., 242 U.S. 568, 37 S.Ct. 227 (1917).

22

Ohio's licensing requirement was an improper exercise of

the state's police power. 242 U.S. at 548. The Court

concluded that the requirement was a valid means of

protecting against fraud, and noted that the

Commissioner's ability to deny or revoke a license was

qualified by a duty of good faith, and subject to judicial

review. Id., at 553. The Court reasoned:

The provisions . . . apply to dispositions . . . within the

state, and while information of those issued in other

states . . . is required to be filed, they are only affected

by the requirement of a license of one who deals in

them within the state. Upon their transportation into

the state there is no impediment, -- no regulation of

them or interference with them after they get there.

There is the exaction only that he who disposes of

them there shall be licensed to do so, and this only

that they may not appear in false character . . . and

this certainly is only an indirect burden upon them as

objects of interstate commerce, if they may be regarded

as such. It is a police regulation strictly, not affecting

them until there is an attempt to make disposition of

them within the state. Such regulations affect interstate

commerce in them only incidentally.

242 U.S. at 557-8 (emphasis added). Here, the regulation in

question has a far greater impact upon commerce outside

of the state. It prevents solicitation of residents of other

states and thereby has the practical effect of halting sales

to individual purchasers unless those purchasers know of

the securities and make Goldmen an unsolicited offer to

buy. In fact, the Bureau's entire justification for S 60 rests

upon its admitted desire to stop such solicitations, and

thereby stop solicited sales. Therefore, it is as misleading as

it is inaccurate to conclude that the extraterritorial affect of

S 60 is "incidental" and to uphold the prohibition as a

regulation of New Jersey's "half" of an interstate

transaction. See Maj. Op. at 16. Themajority states:

If New Jersey seeks to block Goldmen's offering but the

buyer's state (say, New York) would allow it, one state

must prevail. One state can in effect "force its

judgment" upon the other. . . . block the transaction

even if New York would permit it.

23

Goldmen's alternative is no better, however: under its

view of the dormant commerce clause, New York's

approval would permit the transaction, over New

Jersey's objection. Thus, the difference between New

Jersey's Blue Sky law and Goldmen's proposal is simply

the market's default rule: should the transaction be

allowed if either state permits, or blocked if either side

objects? Such questions of the market's "structure" and

its "method of operation" are quite simply beyond the

concern of the Commerce Clause, as they "relate to the

wisdom of the statute, not to its burden on commerce."

Exxon Corp. v. Governor of Maryland, 437 U.S. 117,

127-28 (1978).

Maj. Op. at 16. However, applying S 60 to bar solicitation

where a security could otherwise be sold goes to the very

heart of the Commerce Clause. The question is not which

state's regulations will prevail, but whether either state has

an interest of sufficient gravity to allow it to enforce its

regulations in a manner that so effects interstate

commerce. The majority's analysis focuses only upon the

interest of the inconsistent regulatory schemes in the

relevant "competing" states. That approach fails to afford

proper recognition of the overriding federal interest that

must control under a Commerce Clause analysis. See

Kassell et al. v. Consolidated Freightways Corp. 450 U.S.

662 (1981).

In Kassell, an interstate trucking company sought to

strike down an Iowa law that limited the size of trucks on

interstate highways in Iowa to 50 feet. Consolidated

Freightways sought to invalidate the restriction arguing it

burdened interstate commerce. Neighboring states, and

nearly all other states in the west, and midwest allowed

trucks up to 65 feet in length on the portion of interstate

highways within their borders. Accordingly, interstate

trucking companies had to either use shorter trucks to

transport cargo through the midwest, route cargo around

Iowa, or switch trailers at the Iowa border in order to insure

that they did not exceed Iowa's length restriction. The Court

concluded that Iowa's proffered justification of safety was

tenuous at best because the record did not establish that

reducing trailer size had as direct an impact on the safety

of an interstate highway as Iowa claimed.

24

Regulations designed for [safety] nevertheless may

further the purpose so marginally, and interfere with

commerce so substantially, as to be invalid under the

Commerce Clause. . . . In [Raymond Motor

Transportation, Inc. v. Rice, 434 U.S. 429, (1978)] we

declined to accept the State's contention that the

inquiry under the Commerce Clause is ended without

a weighing of the asserted safety purpose against the

degree of interference with interstate commerce. 434

U.S., at 443, 98 S.Ct., at 795. This "weighing" by a

court requires-- and indeed the constitutionality of the

state regulation depends on-- a sensitive consideration

of the weight and nature of the state regulatory

concern in light of the extent of the burden imposed on

the course of interstate commerce.

Id. at 670 (internal quotation marks omitted).

Although it appears at first that Kassell can easily be

distinguished from the facts before us, I believe the ease

with which Kassell can be dismissed is somewhat illusory.

The distinction stems from the tangible nature of the

commerce involved in Kassell rather than the quality of its

relationship to interstate commerce. The impact of a

regulation upon trucks moving on interstate highways is

readily apparent. The impact of S 60 upon commerce

outside of New Jersey is intangible, but nevertheless real.

New Jersey's interest here is not prevention of fraud

because fraud is not alleged. Thus, I disagree with the

weight the majority attaches to New Jersey's claimed

interest in protecting the reputation of securities dealers

that sell from offices in New Jersey. Maj. Op. at 17. New

Jersey's attempt to preserve S 60 by pointing to its

legitimate interest in preventing fraud is not unlike Iowa's

attempt to preserve its regulation by arguing that it

furthered the safety of its interstate highways in Kassell.

That argument was not supported by the record there, and

the fraud argument is not supported by the record here.

New Jersey can not prevent the sale of a security in a state

where the sale is proper merely by alleging a concern for

the speculative nature of Imatec, and alleging concerns

regarding Goldmen's business practices. If Goldmen (or any

other broker) engages in misleading and improper business

25

practices in the sale of Imatec stock (or any other stock or

commodity for that matter) New Jersey can certainly

investigate and remedy the situation under its police

powers. See Merrick, supra. The Bureau can prohibit fraud

in the offer, sale and purchase of securities, N.J.S.A. 49:3-

52; it can prohibit misleading filings, N.J.S.A. 49:3-54; it

can prohibit unlawful representations concerning

registration, N.J.S.A. 49:3-55; it can conduct investigations,

subpoena witnesses and require the production of evidence,

N.J.S.A. 49:3-68; and it can enjoin illegal conduct, N.J.S.A.

49:3-69.

Accordingly, the majority's citation to Stevens v. Wrigley

Pharma. Co., 154 A. 403, 403 (N.J. Ch. Div. 1931) (noting

that New Jersey's interest in regulating in-state offers to

out-of-state buyers is "not so much to protect the citizens

of other states, as to prevent this state from being used as

a base of operations for crooks marauding outside the

state."), and Simms Inv. Co. v. E.F. Hutton & Co., 699 F.

Supp. 543, 545 (M.D.N.C. 1988) ("[T]he laws protect

legitimate resident issuers by exposing illegitimate resident

issuers."), is misplaced. See Maj. Op. at 17. If that is New

Jersey's interest here, let the Bureau allege and prove

fraud. We are far too quick to allow New Jersey to proceed

as though it had established a fraud it is not even alleging.

We ought not rest our decision here upon concerns that

arise from insinuations and implications about unproven,

and unalleged, conduct on the part of Goldmen.

The majority also relies upon New Jersey's ability to

regulate "in-state offers to out-of-state buyers" stating that

such an interest "also serves New Jersey interests by

protecting New Jersey residents from dubious securities

that enter the state in the secondary market." Maj. Op. at

18. Yet, S 60 does not do that. Goldmen can solicit sales of

Imatec shares to institutional buyers, and other broker-

dealers no matter where they are located. Similarly, he can

sell these shares to individuals in New Jersey and

elsewhere so long as he does not solicit the buyer. Once

any such sales occur, the shares are in the secondary

market and Goldmen is no longer restrained by S 60.2

_________________________________________________________________

2. The Bureau takes the position that individuals who make an

unsolicited offer to buy from Goldmen, and institutional buyers and

26

II.

The Supreme Court "has adopted what amounts to a two-

tiered approach to analyzing state economic regulation

under the Commerce Clause." Brown-Forman Distillers

Corp. v. New York State Liquor Authority, 476 U.S. 573,

578-79 (1986). "When a state statute directly regulates or

discriminates against interstate commerce, or when its

effect is to favor in-state economic interests over out-of-

state interests, [the Supreme Court] has generally struck

down the statute without further inquiry." Id. at 579.

"When, however, a statute has only indirect effects on

interstate commerce and regulates evenhandedly, [the

Court] has examined whether the State's interest is

legitimate and whether the burden on interest commerce

clearly exceeds the local benefits." Id. (citing Pike v. Bruce

Church, Inc., 397 U.S. 137, 142 (1970)).

Although I believe a strong case can be made that S 60

falls within the first tier of inquiry and therefore could be

struck down as a per se violation of the Commerce Clause,

I think our inquiry should, more appropriately, be

conducted under the Pike balancing test that guides inquiry

under the second tier.3

Although the majority does not directly refer to Pike v.

Bruce Church, it is obvious that, by discussing New Jersey's

_________________________________________________________________

other broker-dealers are better informed. The Bureau reasons that

extremely risky securities will, therefore, not enter New Jersey via the

secondary market as they won't be sold in the first place. However, these

better informed buyers may well purchase shares of even the riskiest

stock based upon a belief that the risk is offset by the selling price,

and

the potential for greater profit. For a discussion of the various theories

of how risk, information about an issuer, and potential profit are

factored into the selling price of shares of stock, see Robert G. Newkirk,

Comment, Sufficient Efficiency: Fraud on the Market in the Initial Public

Offering, 58 U. Chi. L. Rev. 1393 (1991).

3. The Supreme Court has "recognized that there is no clear line

separating the category of state regulation that is virtually per se

invalid

under the Commerce Clause, and the category subject to the Pike v.

Bruce Church balancing approach." Brown-Forman Distillers Corp. v. New

York State Liquor Authority, 476 U.S. at 578-79."In either situation the

critical consideration is the overall effect of the statute on both local

and

interstate activity." Id.

27

local interests, it is engaging in a balancing of interests as

required by Pike. In Pike, the Court wrote:

Where the statute regulates even-handedly to

effectuate a legitimate local public interest, and its

effects on interstate commerce are only incidental, it

will be upheld unless the burden imposed on such

commerce is clearly excessive in relation to the local

putative benefits. If a legitimate local purpose is found,

then the question becomes one of degree. And the

extent of the burden that will be tolerated will of course

depend on the nature of the local interest involved, and

on whether it could be promoted as well with a lesser

impact on interstate activities. Occasionally the Court

has candidly undertaken a balancing approach in

resolving these issues, but more frequently it has

spoken in terms of "direct" and "indirect" effects and

burdens.

397 U.S. 137, 142 (1970).

Moreover, a state cannot impose its regulatory scheme on

another state in an effort to "control conduct beyond the

boundaries of the state." Healy v. Beer Institute, 491 U.S.

324, 326 (1989). This prohibition against extraterritoriality

"reflect[s] the Constitution's special concern both with the

maintenance of a national economic union unfettered by

state-imposed limitations on interstate commerce and with

the autonomy of the individual states with their respective

spheres." Id. The Supreme Court has summarized the

application of the limitations inherent in the Commerce

Clause as follows:

[O]ur cases concerning the extraterritorial effects of

state economic regulation stand at a minimum for the

following propositions: First, the Commerce Clause . . .

precludes the application of a state statute to

commerce that takes place wholly outside of the State's

borders, whether or not the commerce has effects

within the State. . . . Second, a statute that directly

controls commerce occurring wholly outside the

boundaries of a State exceeds the inherent limits of the

enacting State's authority and is invalid regardless of

whether the statute's extraterritorial reach was

28

intended by the legislature. The critical inquiry is

whether the practical effect of the regulation is to

control conduct beyond the boundaries of the State.

Third, the practical effect of the statute must be

evaluated not only by considering the consequences of

the statute itself, but also by considering how the

challenged statute may interact with the legitimate

regulatory regimes of other States and what effect

would arise if not one, but many or every, State

adopted similar legislation. Generally speaking, the

Commerce Clause protects against inconsistent

legislation arising from the projection of one state

regulatory regime into the jurisdiction of another.

Id. at 336-37 (citations and internal quotations omitted).

I agree that Goldmen's telephone solicitation of out-of-

state buyers for shares of Imatec would not be a

transaction occurring "wholly outside" of New Jersey.

However, the majority's view that the Bureau is only

regulating its "half" of a transaction by prohibiting Goldmen

from soliciting out-of-state buyers, see Maj. Opn. at 16, is

accurate in theory, but not accurate in the jurisprudential

reality of the Commerce Clause. Goldmen is not the issuer

of these securities. It is only the underwriter. Imatec, a

Delaware corporation whose main office is in New York, is

the issuer. Imatec's only connection with New Jersey is that

its offering was underwritten by a broker-dealer who

happens to be located there, and that broker dealer

planned to solicit out-of-state sales from its New Jersey

office. It may be reasonably assumed that out of state

buyers would purchase these shares from funds held in

financial institutions outside of New Jersey, and that any

profits would be deposited into those same financial

institutions. Moreover, the growth and fiscal strength of

Imatec, the Delaware corporation, is related to the value of

its shares. Thus, New Jersey's only connection with this

interstate transaction lies in the fortuitous circumstance

that a broker-dealer would be sitting at a desk somewhere

in New Jersey making telephone calls to residents of the 16

states where Imatec securities are appropriately registered

and authorized for purchase.

29

Goldmen has satisfied the registration requirements of 16

states and those states allow their residents to be solicited

to purchase shares of Imatec. Each of those states could

have enacted a regulatory scheme that only allowed the

sale of securities properly registered in the state where the

seller maintains its principal office. None of the 16 states

have chosen to do so. Our holding has the practical effect

of reading S 60 into the regulations of each of those states

despite the absence of such a restriction in the regulatory

schemes of the 16 states. The majority concludes that this

result is consistent with the Commerce Clause because it

furthers two "particularly strong" local interests, viz.,

preserving the reputation of New Jersey broker-dealers and

protecting New Jersey buyers in the secondary market. Maj.

Opn. at 17-19. My colleagues can reach this conclusion by

viewing S 60 as having only an "incidental" impact on

interstate commerce. As I state above, S 60 imposes an

absolute ban on interstate commerce that consists of

soliciting individual buyers of Imatec stock from New

Jersey. If we analyzed the regulation from the perspective of

that absolute ban on the solicited sale of Imatec securities

to residents of the states where the securities have been

approved for sale, the burden on interstate commerce

would be far more substantial than the majority suggests.

However, even assuming arguendo that the regulations at

issue here have only an "incidental" effect on interstate

commerce, New Jersey's interest is still not sufficient to

justify prohibiting solicitations in 16 states where these

securities are registered. I believe that finding such an

interest requires more than the asserted need to protect

potential purchasers residing elsewhere from the risks of

penny stocks and sellers such as Goldmen. It requires

some showing that the interests New Jersey seeks to

further would be advanced by applying S 60 to solicitations

of Imatec. If the Bureau can establish that Goldmen is

engaging in false and misleading sales practices or fraud,

New Jersey has an interest sufficient to survive scrutiny

under the Commerce Clause. But, the Bureau concedes

that "[t]his is not a fraud case." App. at 558. Therefore, I

am at a loss to understand how the majority can conclude

on the record before us that New Jersey has shown a

"particularly strong" interest.

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Since New Jersey's interest absent fraudulent business

activities is minimal at least, the federal interests are

paramount. It is not a question of allowing one state's

regulatory scheme to prevail over that of another state. "The

balance here must be struck in favor of the federal

interests." Kassell, 450 U.S. at 667. Accordingly, I believe

we should affirm the decision of the district court.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

31