1999 Decisions

Opinions of the United

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Precedential or Non-Precedential: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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http://digitalcommons.law.villanova.edu/thirdcircuit_1999/4
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 socalled "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. GeigerJones 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 instate 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 instate 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 instate 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-ofstate 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 brokerdealers, and protecting New Jersey buyers in the secondary 

market. 

IV. 

Because the Bureau's application of S 60 regulates the instate 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 brokerdealers 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 twotiered 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-ofstate 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-ofstate 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. 

 30 
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