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. e du/thir dc ir c uit_1999/4Filed 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 a rgument but before clearance of this Opinion. Judge Alito took Judge R oth'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.

2Karen 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 challeng e to one aspect of the New Jersey Uniform Securities Law . The appellee, A.S. Goldmen & Co., Inc. ("Goldmen"), cla ims that N.J.S.A. S 49:3-60 ("S 60") violates the dormant co mmerce clause insofar as it authorizes the appellant New J ersey Bureau of Securities to prevent Goldmen from sellin g securities from New Jersey to buyers in other state s 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 doe s not run afoul of the dormant commerce clause, and there fore

reverse.

3I.

A.

Because of the noted potential for fraud and decept ion in the buying and selling of securities, securities ma rkets are among the most heavily regulated markets in the Uni ted 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 socalled "blue sky" laws was to allow state authoriti es to prevent unknowing buyers from being defrauded into buying securities that appeared valuable but in fac t were worthless.3 By 1933, all but one state had passed b lue sky laws; today, all fifty states, the District of Colu mbia, Guam, and Puerto Rico have blue sky laws in force. See Lo uis 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 Securiti es Act of 1933 and the Securities Exchange Act of 1934. Today , the Securities and Exchange Commission ("SEC") administ ers these and five other federal statutes, which altoge ther form a complex web of federal regulations. See id. at 22 4-81. Despite this complex federal scheme, Congress, the courts, and the SEC have made explicit that federal regulat ion was not designed to displace state blue sky laws that r egulate 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 Securitie s Markets Improvement Act of 1996); Merrill Lynch, Pierce, Fe nner & Smith, Inc. v. Ware, 414 U.S. 117, 137 (1973) ("Con gress

___________________________________________________ ______________

2. Securities are the collective term used to descr ibe documents that represent ownership in a company or a debt. Common examples include stocks, bonds, notes, convertible debentures, and w arrants. 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. Mi ller, Origin of the Blue Sky Laws, 70 Tex. L. Rev. 347 (1991).

4intended to subject [securities] exchanges to state

regulation that is not inconsistent with the federa l [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 expandi ng the range of federal preemption, federal and state regu lations each continue to play a vital role in eliminating s ecurities fraud and abuse. See Loss & Seligman at 60-62; Mann ing G. Warren III, Reflections on Dual Regulation of Se curities Regulation: A Case Against Preemption, 25 B.C. L. R ev. 495, 497, 501-27 (1984) (describing how Congress, the co urts, and the SEC have expressly authorized the enforceme nt of state blue sky laws).

B.

Among blue sky laws, the most common regulatory approach is the mixed disclosure and merit regulati on scheme offered by the Uniform Securities Act ("Unif orm Act").4 Drafted in large part by the late Professor Louis L oss, 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 p arts: provisions requiring the registrations of securitie s sold within the state; provisions requiring the registra tion of persons involved in the securities industry; and va rious antifraud provisions. See id; see also Joseph C. Lo ng, 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 codificat ion of the portion of the Uniform Act that makes it "unlawful for any security to be offered or sold in this State" unles s the security is either registered by state authorities, is exempt

___________________________________________________ ______________

4. The various state and federal securities regulat ions reflect two broad regulatory philosophies: merit regulation and discl osure. Regulations based on disclosure principles, such as the federal Securities Act of 1933, seek to provide investors with all material a nd relevant information about the securities and the company of fering them. In contrast, merit regulations seek to protect investo rs by prohibiting transactions that authorities deem unfair or unjust . See Joseph C. Long, 12 Blue Sky Law S 1.05 (1997).

5under 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 thi s State . . . when the offer . . . originates in this State," S 6 0 grants New Jersey regulatory authorities the power to regulate the offer or sale of all non-exempt, non-covered securities w henever the offer is made within the state of New Jersey. U nder

N.J.S.A. S 49:3-64 and the 1985 amendments to the N ew 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 J ersey when it is deemed in the public interest and variou s statutory requirements have been met.

II.

A.

A.S. Goldmen & Co. is a securities broker-dealer wi th its sole office located in Iselin, New Jersey.6 At the time of proceedings before the District Court, Goldmen's so le 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 offe rings of low priced, over-the-counter securities, and the n selling those securities in the secondary market. During th efirst several months of 1996, Goldmen planned the initial public

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

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

unless: (a) The security or transaction is exempt un der section 3 of P.L.1967, c. 93 (C.49:3-50);

. . . (e) The security is registered under this ac t; or (f) It is a federal covered security for whi ch a notice filing and

fees have been submitted as required by section 1 4 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 trans actions in securities

for

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

6offering of Imatec, Ltd. ("Imatec"). Imatec is a De laware

corporation, located in New York, that was formed i n 1988 to develop, design, market, and license image enhan cement technologies. Goldmen planned for the Imatec securi ties 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 pri mary regulation of the Imatec security during the first 25 calendar days of the offering would occur at the st ate level. See 17 C.F.R. S 230.174(d) (1992). Accordingly, in May 1996, Goldmen concurrently filed registration state ments with the SEC, and also attempted to register the of fering "by qualification" with state regulatory authoritie s 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 w ould own the shares to be offered to the public. Reviewi ng Goldmen's application, the Bureau expressed various concerns regarding the Imatec offering to Goldmen's counsel. Although the Bureau was not prepared to ma ke allegations of fraud, it had already been investiga ting Goldmen's business practices at that time, and was concerned that the combination of Goldmen's practic es and the bleak financial prospects of Imatec made the of fering a high-risk investment that was likely to be associat ed with abusive and manipulative sales practices.

On August 7, 1996, the Bureau informed Goldmen's counsel that it was considering the issuance of a s top order that would block the Imatec offering from being reg istered in New Jersey. Goldmen's counsel and the Bureau the n entered into negotiations concerning the future of the Imatec offering. On October 23, 1996, these negotia tions

___________________________________________________ ______________

7. Registration "by qualification" is the most comp rehensive form of blue sky registration, and is generally necessary when t he security is exempt from initial federal registration requirements. The other types of registration, registration "by notification" and re gistration "by coordination," are much simpler and are reserved fo r securities that carry a higher indicia of reliability than securiti es that must be registered by qualification. See N.J.S.A.S 49:3-61 (describing requirements for registration by qualification).

7resulted in a Consent Order signed by the CEO of Im atec

and the Bureau chief. According to the Consent Orde r, Goldmen withdrew its application to register the Im atec offering in New Jersey, and agreed that the Imatec offering did not qualify for N.J.S.A. S 49:3-50(b) exemption s to the registration rule of S 60. Goldmen was permitted to make unsolicited sales from New Jersey or to sell to cer tain

financial institutions or to other broker-dealers. However, the Consent Order specifically denied Goldmen exemp tions

that would have allowed it to solicit members of th e public to purchase Imatec stock in the secondary market. A pp. 38-41; App. 156-57.

Five days after Goldmen entered into the Consent Or der, on October 28, 1996, the registration statement tha t
Goldmen had filed with the SEC became effective. 8 As of that date, Goldmen had managed to register the Imat ec offering in sixteen states, but had been forced to withdraw its registration in several others, including New J ersey.

On the morning of October 29, 1996, Goldmen commenced the initial public offering from its offi ce in Iselin, New Jersey. By telephone, Goldmen solicited sales to individuals outside of New Jersey, but did not soli cit any sales to individuals within New Jersey. By 3 p.m. o f that day, Goldmen had sold the entire public offering. 9 Subsequently, Goldmen continued to buy and sell Ima tec
securities in the interdealer market from its New J ersey office.

___________________________________________________ ______________

8. Registration with the SEC does not imply SEC app roval of the offering. See 15 U.S.C. S 77w (1997) ("[T]he fact that the re gistration statement

for a security has been filed or is in effect . . . sha ll [not] be deemed a finding by the Commission that the registration sta tement is true and accurate on its face . . . , or be held to mean tha t the Commission has in any way passed upon the merits of, or given appr oval to, such security.")

9. We do not regard this case as moot despite the f act that the Imatec offerings are concluded. We are concerned that this kind of case presents a problem that may be capable of repetitio n 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.

8The Bureau learned of Goldmen's sales on November 7
,

1996. Because the window for state regulation of th e Imatec offering closed 25 days after the offering b egan,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 s ales violated neither state law nor the consent order, a nd

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 an d sale of Imatec in or from the State of New Jersey to any me mbers of the public." App. 91.

B.

On the same day that the Bureau issued the Cease an d Desist Order, Goldmen filed this declaratory judgme nt 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 Jerse y and were sold by brokers located in New Jersey to resid ents of states (other than New Jersey) in which the securit ies were qualified for sale, violates the Commerce Clause of the United States Constitution." The complaint also all eged 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 C onsent Order was to prohibit Goldmen from selling the secu rities to buyers located in New Jersey.

The district court issued an Order to Show Cause, a nd held a hearing on November 20, 1996.11 The distric t 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 preemp ted. 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 en unciated in Younger

9issued a preliminary injunction the same day, enjoi ning the

Bureau from taking any action that would prohibit Goldmen from "soliciting, offering or selling secur ities that are not registered or exempt from registration in N ew Jersey to residents of states (other than New Jersey) in w hich the securities are qualified for sale." App. 402-03.

The case then proceeded to cross-motions for summar y judgment. On August 21, 1997, the district court gr anted Goldmen's motion for summary judgment and denied th e Bureau's summary judgment motion. The sole issue addressed was whether the New Jersey Uniform Securi ties Law violated the dormant commerce clause by authori zing

the Bureau to block the sale of securities from New Jersey to buyers in other states where the security was re gistered. The district court concluded that it did. According to the district court, the law directly regulated intersta te 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 Bure au to preclude consumers in other states from receiving solicitations to purchase securities which their ow n 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." Furt her, the district court argued that absent allegations of fr aud, the Bureau had no interest in regulating such transacti on. 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 d istrict court rejected this argument. App. 446. Because the Bureau has cho sen not to raise this issue on appeal, we will not address it furthe r. Compare Ohio Bureau of Employment Services v. Hodory, 431 U.S. 471, 477 -80, 97 S.Ct. 1898, 1904 (1977).

10III.

A. Legal Framework

The Supreme Court has long construed the Commerce Clause as implying a judicial power to invalidate s tate 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 author izes courts to invalidate state regulations when their extraterritorial impact is so great that their "pra ctical effect . . . is to control conduct beyond the boundaries o f the state." Healy v. The Beer Institute, 491 U.S. 324, 336, 109 S.Ct. 2491, 2499 (1989). As Justice Cardozo explain ed in Baldwin v. G.A.F. Seelig, 294 U.S. 511, 523, 55 S.C t. 497, 500 (1935), such a power is necessary to prevent st ates from applying "parochial" laws that can bring about "a speedy end of our national solidarity." "The Consti tution," 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 s alvation

are in union and not division." Id.

According to these "extraterritorial effects" cases , a state may not attempt to regulate commerce that takes pla ce "wholly outside" of its borders: such a "projection of one state regulatory regime into the jurisdiction of an other State" is impermissible. Healy, 491 U.S. at 336-37; 109 S. Ct. at 2499. Under this rubric, the Supreme Cour t has

invalidated state laws that restricted interstate m ovement of goods based on the price paid for them in out-of-st ate 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 pa id outside of New York to the out-of-state producer wa s lower than that permitted under then-existing laws regula ting 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 exp orted wheat to be sold outside of North Dakota at price s et by North Dakota state inspector). Similarly, the Court has struck down state laws that prohibited the importat ion of out-of-state goods unless the importer guaranteed t hat its

11in-state prices were no higher than elsewhere. See, e.g.,

Healy, 491 U.S. at 337, 109 S. Ct. at 2499 (invalid ating Connecticut law prohibiting beer imports unless sel ler guaranteed that prices offered in Connecticut were no higher than in neighboring states); Brown-Forman Di stillers 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 of fered to New York wholesalers were lowest nationwide). Final ly, the Court has invalidated laws granting officials in on e 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 I llinois officials to block substantively unfair takeovers o f multistate companies that had connections to Illino is and
also other states).

Of course, these cases do not establish that the st ates are forbidden categorically to regulate transaction s that

involve interstate commerce. See H.P. Hood & Sons v . Du Mond, 336 U.S. 525, 532-33, 69 S. Ct. 657, 662 (194 9) (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 transact ions so long as the regulation furthers legitimate in-state interests. A particularly relevant example of this is Hall v. GeigerJones Co., 242 U.S. 539, 37 S. Ct. 217 (1917), and its companion cases, Caldwell v. Sioux Falls Stock Yard s 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 S ky Cases,

the Court considered dormant commerce clause challe nges to then-recently enacted Blue Sky laws in Ohio, Sou th Dakota, and Michigan. Although the three statutes d iffered somewhat, each granted state securities commissions the authority to block the in-state sale or purchase of unlicensed securities. The laws were challenged bot h 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

12violated the dormant commerce clause. The key to th e laws'

constitutionality, the Court held, was that "[t]he provisions of the law . . . apply to dispositions of securitie s within the state." Hall, 242 U.S. at 557, 37 S. Ct. at 223 (em phasis in original). By limiting the scope of the statute to dispositions of securities "within the State," the Court announc ed, the states had merely enacted "police regulation[s]," t hat "affect[ed] interstate commerce . . . only incident ally." Id. at 558, 37 S. Ct. at 223; see also CTS Corp. v. Dynami cs Corp., 481 U.S. 69, 93, 107 S.Ct. 1637, 1651-52 (19 87) (rejecting challenge by out-of-state company to Ind iana law conditioning acquisition of corporate control of In diana corporation on approval of a majority of the pre-ex isting disinterested shareholders, reasoning that law regu lated instate corporations); cf. Shafer v. Farmers' Grain C o, 268 U.S. 189, 200, 45 S. Ct. 481, 485 (1925) (invalidat ing North Dakota law that regulated in-state handling of whea t headed for interstate commerce that served no legit imate in-state interests).

B. Territoriality

As these cases indicate, the constitutionality of s tate 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 occ urs "wholly outside" the boundaries of the state, the regulatio n is unconstitutional. MITE Corp, 457 U.S. at 642. If th e transaction occurs "within" the boundaries of the s tate, it is constitutional so long as the regulation furthers l egitimate in-state interests. See id. at 643-46; CTS Corp, 48 1 U.S. at

93.

Therefore, the first issue we must address is the territorial scope of the transaction that New Jerse y has attempted to regulate. The question is, what is the territorial basis of a contract entered into by tel ephone between a New Jersey broker soliciting sales of Ima tec securities from New Jersey, and an out-of-state buy er who agrees to purchase them outside of New Jersey? More particularly, can it fairly be said that such a tra nsaction occurs "wholly outside" New Jersey? As this is a le gal question, our review is plenary. See Ciarlante v. B rown &

13Williamson 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 wi lling buyers from completing transactions authorized by t heir home states. According to Goldmen, "the effects of the Bureau's application of Section 60 is not to regula te instate brokers, but to preclude out-of-state residen ts from purchasing a product deemed appropriate for sale by their own regulators." Br. at 20. Goldmen suggests that t he offer's origin in New Jersey is not relevant to the transaction's territoriality, because "the `practic al 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 resid ents 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 of fering of securities entirely within the state of New Jers ey. According to the Bureau,

Section 60 simply regulates how brokers loca ted in New Jersey conduct business from their New J ersey offices. In this instance, these were Imatec securities . . . offered for sale by the underwriter th rough solicitations of the public from New Jersey. The offer and sale arose in New Jersey. Goldmen chose to domicile its highly-regulated business in Ne w Jersey
and to conduct that business from within the State.

Br. at 27.12 The Bureau concedes that S 60 may affe ct interstate commerce, to the extent that sellers suc h as Goldmen try to sell securities to buyers in other s tates. 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.

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12. Both amici, North American Securities Aministra tors 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.

14In resolving this question, we begin by noting that

notions of the territorial scope of contracts betwe en citizens of different states have evolved in the past centur y. At one time, it was fashionable to conceive of contracts b etween diverse parties as being rooted in a single geograp hical location, such as the place the offer was accepted. See, e.g., Joseph H. Beale, What Law Governs Validity of a Con tract, 23 Harv. L. Rev. 260, 270-71 (1910). Under this tra ditional approach, it was believed that when a contract offe r made in New Jersey was accepted in New York, the contrac t 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 tha t
contracts formed between citizens in different stat es 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 h ave occurred in each state, and that both states have a n interest in regulating the terms and performance of the contract. See, e.g., General Ceramics Inc. v. Firem an's Fund Ins. Co., 66 F.3d 647, 656-59 (3d Cir. 1995) (compa ring 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 stat es in contract disputes between diverse parties).

This notion that the sovereignty of both the state of the offeror and offeree are implicated by contracts ent ered into by citizens in different states is the key to under standing the territorial scope of the contract between Goldm en and the prospective buyers of Imatec in another state s uch 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 s tate,

15and each state has an interest in regulating the as pect of

the transaction that occurs within its boundaries.1 3

Accordingly, S 60 simply allows the Bureau to regul ate its

"half" of the transaction-- the offer that occurs e ntirely within the state of New Jersey-- and thus its terri torial scope is indistiguishable from that in Hall v. Geig er-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 viol ates the dormant commerce clause because it projects its ban into jurisdictions that would allow the transaction is l ogically flawed and simply proves too much. If New Jersey se eks to block Goldmen's offering but the buyer's state (say , New York) would allow it, one state must prevail. One s tate can in effect "force its judgment" upon the other. Unde r 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 app roval would permit the transaction, over New Jersey's obj ection. Thus, the difference between New Jersey's Blue Sky law and Goldmen's proposal is simply the market's defau lt rule: should the transaction be allowed if either state p ermits, or blocked if either side objects? Such questions of t he market's "structure" and its "method of operation" are quite simply beyond the concern of the Commerce Clause, a s they "relate to the wisdom of the statute, not to i ts 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 con sider whether the statute reasonably furthers a "legitima te interest" within the boundaries of New Jersey. MITE Corp.,

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

subsection C.

16457 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 sal es to out-of-state residents. If Goldmen's business pract ices are manipulative, Goldmen argues, the harm will be suff ered entirely by out-of-state consumers. Br. at 29. Beca use the protection of out-of-state consumers from potential ly manipulative sales practices is not New Jersey's le gitimate concern, Goldmen contends, its regulation of Goldme n's

non-fraudulent sales to out-of-state consumers does not implicate any legitimate regulatory interests withi n the state of New Jersey.

The Bureau responds by arguing that its regulation of instate sales of securities to out-of-state purchaser s furthers important New Jersey interests. We agree. In partic ular, we consider two legitimate state interests to be parti cularly 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 pas t, as their legitimate broker-dealers suffered from assoc iation with suspect firms offering questionable securities . See Long, S 3.04[3][a] at 3-51 to 3-52 (providing examp les); see also Stevens v. Wrigley Pharma. Co., 154 A. 403, 40 3 (N.J. Ch. Div. 1931) (noting that New Jersey's interest i n regulating in-state offers to out-of-state buyers i s"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. C o. 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 sta te 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 bloc k sales of securities that it believes might be associated with dubious or manipulative sales practices. The differ ence between a state's (i.e., New Jersey's) interest in preventing fraud and preventing questionable practices is a di fference in degree, not a difference in kind.

17The dissent contends that absent proof of actual fr aud,

New Jersey has an insufficient interest in regulati ng securities dealers who sell to out-of-state buyers. It is undisputed that the purpose of securities registrat ion laws is to prevent fraud before it happens, and S 60 ser ves such a prophylactic purpose. Merrick v. N.W. Halsey & Co ., 242 U.S. 568, 587 (1917);14 Caldwell v. Sioux Falls Sto ck Yards Co., 242 U.S. 559, 564 (1917) (upholding Blue Sky L aw designed "to prevent fraud in the sale and disposit ion of stocks, bonds or other securities sold or offered f or sale within the state"); Hall v. Geiger-Jones Co., 242 U .S. 539, 551 (1917) (upholding Blue Sky Law designed to "pre vent 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 J ersey Uniform Securities Law is intended to protect the uninitiated and to prevent frauds upon the public a t large), aff'd sub nom. Cola v. Packer, 383 A.2d 460 (N.J. S uper. Ct. App. Div. 1974); New Jersey v. Russell, 291 A.2d 58 3, 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-ofstate buyers serves the legitimate purpose of preve nting

fraudulent transactions.

Regulating in-state offers to out-of-state buyers a lso serves New Jersey interests by protecting New Jerse y residents from dubious securities that enter the st ate in the secondary market. This risk is particularly great b ecause a

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

within the power of the state. It burdens honest bu siness, it is true, but burdens it only that under its forms dishone st business may not be done. This manifestly cannot be accomplished by mere declaration; there must be conditions imposed and provisi on made for their performance. Expense may thereby be caused a nd 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).

18broker-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 the re is no filing requirement for secondary transactions, Gold men could arrange to "sell" a security to a friendly ou t-of-state party, immediately buy back the security, and then sell it freely to New Jersey residents using possibly quest ionable sales practices. App. 77-78.15 New Jersey's most ef fective means of preventing such an undesirable result woul d 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 s tate interests: preserving the reputation of New Jersey brokerdealers, and protecting New Jersey buyers in the se condary

market.

IV.

Because the Bureau's application of S 60 regulates the instate portion of an interstate transaction and furt hers legitimate in-state interests, the application ofS 60 to regulate the Imatec offering does not violate the d ormant commerce clause. In so holding, we note that our conclusion is in accordance with the overwhelming m ajority

of courts that have considered dormant commerce cla use 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 substant ial federal question, 439 U.S. 961 (1978); Chrysler Cap ital Corp. v. Century Power Corp., 800 F. Supp. 1189, 11 94 (S.D.N.Y. 1992); Upton v. Trinidad Petroleum Corp., 468 F. Supp. 330, 336 (N.D.Ala. 1979), aff'd on other grou nds, 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 longe r need be

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15. Notably, there is evidence in the record that G oldmen had engaged in such practices before. App. 196-98.

19any substantial constitutional doubts about blue sk y

provisions.").16

Indeed, the established heritage and near universal ity 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 lega l fabric of securities regulation. The power that Goldmen claim s would unduly burden interstate commerce is one that most states have long exercised, and that Congress has for deca des 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 .. . in vite a speedy end of our national solidarity." Baldwin, 29 4 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.

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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 l aws against dormant commerce clause challenges. Media Products is disti nguishable, however, because in that case Arizona sought to bar an Arizo na company from selling a security outside of Arizona through an ag ent outside of Arizona to a buyer who was also outside of Arizona. In othe r words, the only

connection the transaction had with Arizona was tha t 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 negotia ted out-of-state[,] solely by [an] out-of-state underwriter . . . . No sales o r offers of sale were

made in Arizona."). Because the offer and acceptance too k place entirely outside of Arizona, Arizona's attempt to block the transaction was not an effort to regulate the in-state component of an int erstate transaction, as

is the case here.

20McKEE, Circuit Judge, dissenting.

I respectfully dissent from the opinion of my colle agues. The majority recognizes New Jersey's right to regul ate that portion of a multi-state transaction occurring with in its borders because "one state must prevail" in a dispu te that extends beyond its borders and involves residents o f other states. Maj. Op. at 16. The approach the majority u ses would be helpful to resolving a choice of law dispu te, but it is of only limited assistance in adjudicating this dispute under the Commerce Clause. New Jersey does not alle ge that Goldmen's sale of Imatec stock involved fraud, and the

district court concluded that fraud was not involve d. 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 suff icient to allow it to prevent Goldmen from soliciting residen ts of other states. The district court concluded, "the Bu reau is reaching out to prohibit a sale, not made to New Je rsey residents, which takes place in a national securiti es market, and which is regulated by each state to pro tect its

own citizens." Id. The district court concluded tha t 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 ju stify the conclusion that New Jersey's interest in regulating offers made from within its borders justifies preventing G oldmen from offering shares of Imatec to buyers residing i n states where that security is properly registered. Maj. Op . at 15.

In Firemen's Fund, the issue was

whether New Jersey or Pennsylvania law contr ols the interpretation of an exception to a pollutio n-exclusion clause when New Jersey has significant conta cts with

the insurance contract and the insured but Pennsylvania is the site of the hazardous wa ste site giving rise to the liability for which cover age is sought.

21Id., at 649. The dispute arose in a diversity case where we

applied New Jersey's choice of law rules to determi ne if the law of New Jersey or Pennsylvania governed the interpretation of an exception to a pollution-exclu sion clause in a comprehensive liability insurance polic y. The loss that gave rise to the dispute resulted from co sts 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 coverag e for the gradual discharge of pollution." Id., at 652. W e held that New Jersey law applied. Id. ("Based on the str ong public policy that underlies New Jersey's broad interpretation of the pollution-exclusion exception ,. . . New Jersey law governs."). We reached that result becau se the interests of Pennsylvania would not have been furth ered by applying its law to that particular dispute, wherea s 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 o r more states. Rather, this dispute focuses upon the impac t of that conflict upon interstate commerce. Nor, do I believ e 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 C lause, they do not address the precise issue that Goldmen raises. In Merrick, (one of the Blue Sky Cases) the Court d id not even address whether the Blue Sky Law at issue viol ated the Commerce Clause. Instead, the Court reserved th at question for decision in Geiger-Jones v. Hall - a c ompanion case to Merrick. See Merrick, 242 U.S. at 590. In H all, 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 broke r with clients in several states including Ohio (Geiger-Jo nes) brought a multi-faceted challenge to the legality o f Ohio's licensing requirement. The primary assertion was th at

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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).

22Ohio's licensing requirement was an improper exerci se of

the state's police power. 242 U.S. at 548. The Cour t 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 j udicial 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 a re only affected by the requirement of a license of one who d eals in them within the state. Upon their transporta tion into the state there is no impediment, -- no regu lation of them or interference with them after they ge t there. There is the exaction only that he who dispo ses of them there shall be licensed to do so, and t his only that they may not appear in false character . . . and this certainly is only an indirect burden up on 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 dispo sition of them within the state. Such regulations affe ct interstate commerce in them only incidentally.

242 U.S. at 557-8 (emphasis added). Here, the regul ation in question has a far greater impact upon commerce out side of the state. It prevents solicitation of residents of other states and thereby has the practical effect of halt ing sales to individual purchasers unless those purchasers kn ow of

the securities and make Goldmen an unsolicited offe r 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 m isleading as

it is inaccurate to conclude that the extraterritor ial 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 offer ing 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 tr ansaction even if New York would permit it.

23Goldmen's alternative is no better, however: under its

view of the dormant commerce clause, New Yor k's approval would permit the transaction, over New Jersey's objection. Thus, the difference bet ween New Jersey's Blue Sky law and Goldmen's proposal is simply

the market's default rule: should the transa ction be allowed if either state permits, or blocked if either side objects? Such questions of the market's "str ucture" and its "method of operation" are quite simply b eyond the concern of the Commerce Clause, as they "rel ate 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 solic itation where a security could otherwise be sold goes to th e very heart of the Commerce Clause. The question is not w hich state's regulations will prevail, but whether eithe r state has an interest of sufficient gravity to allow it to en force 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 intere st that must control under a Commerce Clause analysis. See Kassell et al. v. Consolidated Freightways Corp. 45 0 U.S. 662 (1981).

In Kassell, an interstate trucking company sought t o strike down an Iowa law that limited the size of tr ucks on interstate highways in Iowa to 50 feet. Consolidate d Freightways sought to invalidate the restriction ar guing it burdened interstate commerce. Neighboring states, a nd nearly all other states in the west, and midwest al lowed trucks up to 65 feet in length on the portion of in terstate highways within their borders. Accordingly, interst ate trucking companies had to either use shorter trucks to transport cargo through the midwest, route cargo ar ound Iowa, or switch trailers at the Iowa border in orde r to insure that they did not exceed Iowa's length restriction. The Court concluded that Iowa's proffered justification of sa fety was

tenuous at best because the record did not establis h that reducing trailer size had as direct an impact on th e safety of an interstate highway as Iowa claimed.

24Regulations designed for [safety] neverthele ss may

further the purpose so marginally, and inter fere 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 th at the inquiry under the Commerce Clause is ended w ithout a weighing of the asserted safety purpose ag ainst the degree of interference with interstate comme rce. 434 U.S., at 443, 98 S.Ct., at 795. This "weighi ng" by a court requires-- and indeed the constitution ality of the state regulation depends on-- a sensitive co nsideration of the weight and nature of the state regula tory 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 easil y be distinguished from the facts before us, I believe t he ease

with which Kassell can be dismissed is somewhat ill usory. The distinction stems from the tangible nature of t he commerce involved in Kassell rather than the qualit y of its relationship to interstate commerce. The impact of a regulation upon trucks moving on interstate highway s is readily apparent. The impact of S 60 upon commerce outside of New Jersey is intangible, but neverthele ss real. New Jersey's interest here is not prevention of fra ud because fraud is not alleged. Thus, I disagree with the weight the majority attaches to New Jersey's claime d interest in protecting the reputation of securities dealers that sell from offices in New Jersey. Maj. Op. at 1 7. New Jersey's attempt to preserve S 60 by pointing to it s legitimate interest in preventing fraud is not unli ke 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 h ere. New Jersey can not prevent the sale of a security i n a state where the sale is proper merely by alleging a conce rn for the speculative nature of Imatec, and alleging conc erns regarding Goldmen's business practices. If Goldmen (or any other broker) engages in misleading and improper bu siness

25practices 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 poli ce 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 inve stigations, subpoena witnesses and require the production of ev idence, 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 o ffers to out-of-state buyers is "not so much to protect the citizens of other states, as to prevent this state from bein g used as a base of operations for crooks marauding outside t he 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 illegitimat e resident issuers."), is misplaced. See Maj. Op. at 17. If th at is New Jersey's interest here, let the Bureau allege and p rove 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 t hat arise from insinuations and implications about unpr oven, 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" s tating that such an interest "also serves New Jersey interests by protecting New Jersey residents from dubious securi ties 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 br okerdealers 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 seconda ry market and Goldmen is no longer restrained by S 60. 2

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2. The Bureau takes the position that individuals w ho make an unsolicited offer to buy from Goldmen, and institut ional buyers and

26II.

The Supreme Court "has adopted what amounts to a tw otiered approach to analyzing state economic regulat ion

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 regul ates or discriminates against interstate commerce, or when its

effect is to favor in-state economic interests over out-ofstate interests, [the Supreme Court] has generally struck down the statute without further inquiry." Id. at 5 79. "When, however, a statute has only indirect effects on interstate commerce and regulates evenhandedly, [th e Court] has examined whether the State's interest is legitimate and whether the burden on interest comme rce clearly exceeds the local benefits." Id. (citing Pi ke 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 therefor e could be struck down as a per se violation of the Commerce C lause, 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 Pi ke v. Bruce Church, it is obvious that, by discussing New Jersey's

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other broker-dealers are better informed. The Burea u reasons that extremely risky securities will, therefore, not ent er 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 b y the selling price,

and the potential for greater profit. For a discussion of the various theories of how risk, information about an issuer, and poten tial 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 Dist illers 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.

27local interests, it is engaging in a balancing of i nterests as

required by Pike. In Pike, the Court wrote:

Where the statute regulates even-handedly to effectuate a legitimate local public interes t, and its effects on interstate commerce are only inci dental, 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 pur pose 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 i nvolved, and on whether it could be promoted as well with a lesser impact on interstate activities. Occasionall y the Court has candidly undertaken a balancing approach in resolving these issues, but more frequently it has spoken in terms of "direct" and "indirect" e ffects and

burdens.

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

Moreover, a state cannot impose its regulatory sche me on another state in an effort to "control conduct beyo nd the boundaries of the state." Healy v. Beer Institute, 491 U.S. 324, 326 (1989). This prohibition against extraterr itoriality "reflect[s] the Constitution's special concern both with the

maintenance of a national economic union unfettered by state-imposed limitations on interstate commerce an d with the autonomy of the individual states with their re spective spheres." Id. The Supreme Court has summarized the application of the limitations inherent in the Comm erce 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 eff ects within the State. . . . Second, a statute th at directly controls commerce occurring wholly outside t he

boundaries of a State exceeds the inherent l imits of the enacting State's authority and is invalid re gardless of

whether the statute's extraterritorial reach was

28intended by the legislature. The critical in quiry is

whether the practical effect of the regulati on is to control conduct beyond the boundaries of the State. Third, the practical effect of the statute m ust be evaluated not only by considering the conseq uences of the statute itself, but also by considering how the challenged statute may interact with the leg itimate regulatory regimes of other States and what effect would arise if not one, but many or every, S tate adopted similar legislation. Generally speak ing, the Commerce Clause protects against inconsisten t legislation arising from the projection of o ne state regulatory regime into the jurisdiction of a nother.

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

I agree that Goldmen's telephone solicitation of ou t-ofstate buyers for shares of Imatec would not be a transaction occurring "wholly outside" of New Jerse y. However, the majority's view that the Bureau is onl y regulating its "half" of a transaction by prohibiti ng Goldmen from soliciting out-of-state buyers, see Maj. Opn. at 16, is accurate in theory, but not accurate in the jurispr udential reality of the Commerce Clause. Goldmen is not the issuer of these securities. It is only the underwriter. Im atec, a Delaware corporation whose main office is in New Yo rk, is the issuer. Imatec's only connection with New Jerse y is that its offering was underwritten by a broker-dealer wh o 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 st ate buyers would purchase these shares from funds held in financial institutions outside of New Jersey, and t hat any profits would be deposited into those same financia l institutions. Moreover, the growth and fiscal stren gth 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 circu mstance that a broker-dealer would be sitting at a desk som ewhere in New Jersey making telephone calls to residents o f the 16 states where Imatec securities are appropriately re gistered and authorized for purchase.

29Goldmen 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 tho se states despite the absence of such a restriction in the re gulatory schemes of the 16 states. The majority concludes th at this

result is consistent with the Commerce Clause becau se it furthers two "particularly strong" local interests, viz., preserving the reputation of New Jersey broker-deal ers and protecting New Jersey buyers in the secondary marke t. Maj. Opn. at 17-19. My colleagues can reach this conclus ion 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 o f soliciting individual buyers of Imatec stock from N ew Jersey. If we analyzed the regulation from the pers pective of

that absolute ban on the solicited sale of Imatec s ecurities

to residents of the states where the securities hav e been approved for sale, the burden on interstate commerc e would be far more substantial than the majority sug gests.

However, even assuming arguendo that the regulation s at issue here have only an "incidental" effect on inte rstate commerce, New Jersey's interest is still not suffic ient to justify prohibiting solicitations in 16 states wher e these securities are registered. I believe that finding s uch an interest requires more than the asserted need to pr otect potential purchasers residing elsewhere from the ri sks of penny stocks and sellers such as Goldmen. It requir es some showing that the interests New Jersey seeks to further would be advanced by applying S 60 to solic itations

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 sc rutiny under the Commerce Clause. But, the Bureau concedes that "[t]his is not a fraud case." App. at 558. The refore, I am at a loss to understand how the majority can con clude on the record before us that New Jersey has shown a "particularly strong" interest.

30Since New Jersey's interest absent fraudulent busin ess

activities is minimal at least, the federal interes ts are paramount. It is not a question of allowing one sta te's regulatory scheme to prevail over that of another s tate. "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