AS Goldmen & Co Inc v. NJ Bureau Securities

Opinions of the United
1999 Decisions States Court of Appeals
for the Third Circuit

1-7-1999

AS Goldmen & Co Inc v. NJ Bureau Securities
Precedential or Non-Precedential:

Docket 97-5618

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Filed January 7, 1999

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 97-5618

A.S. GOLDMEN & COMPANY, INC.

v.

NEW JERSEY BUREAU OF SECURITIES,
Appellant

On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil No. 96-cv-05280)
District Judge: Honorable Dickinson R. Debevoise

Argued Thursday, May 21, 1998

BEFORE: ROTH1, McKEE and GARTH, Circuit Judges

Reargued Friday, December 4, 1998

BEFORE: ALITO, McKEE and GARTH, Circuit Judges

(Opinion filed January 7, 1999)

_________________________________________________________________

1. Judge Roth was obliged to recuse herself after argument but before
clearance of this Opinion. Judge Alito took Judge Roth's place upon
reconstitution of the panel and reargument.
Peter Verniero, Attorney General
Office of the Attorney General of
New Jersey
Andrea M. Silkowitz, Assistant
Attorney General
Division of Law
Hughes Justice Complex
CN-112
Trenton, New Jersey 08625

Gail M. Cookson (argued)
Deputy Attorney General
Tracy Thayer
Deputy Attorney General
Office of the Attorney General of
New Jersey
124 Halsey Street
P.O. Box 45029
Newark, New Jersey 07101

Attorneys for Appellant
New Jersey Bureau of Securities

Martin Flumenbaum (argued)
Brad S. Karp
Paul, Weiss, Rifkind, Wharton &
Garrison
1285 Avenue of the Americas
New York, New York 10019-6064

Michael A. Lampert
Saul, Ewing, Remick & Saul
214 Carnegie Center, Suite 202
Princeton, New Jersey 08540

Attorneys for Appellee
A.S. Goldmen & Company, Inc.

2
 Karen M. O'Brien, General Counsel
North American Securities
Administrators Association, Inc.
10 G Street, NE
Suite 710
Washington, D.C. 20002

Attorneys for Amicus-Appellant
North American Securities
Administrators Association, Inc.

Richard E. Walker
Eric Summergrad
Luise de la Torre
Paul Gonson
Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Attorneys for Amicus-Appellant
Securities & Exchange Commission

OPINION OF THE COURT

GARTH, Circuit Judge:

This case raises a dormant commerce clause challenge to
one aspect of the New Jersey Uniform Securities Law. The
appellee, A.S. Goldmen & Co., Inc. ("Goldmen"), claims that
N.J.S.A. S 49:3-60 ("S 60") violates the dormant commerce
clause insofar as it authorizes the appellant New Jersey
Bureau of Securities to prevent Goldmen from selling
securities from New Jersey to buyers in other states where
purchase of the securities was authorized by state

regulators. The district court agreed, and granted summary
judgment in favor of Goldmen. We hold that S 60 does not
run afoul of the dormant commerce clause, and therefore
reverse.

3
I.

A.

Because of the noted potential for fraud and deception in
the buying and selling of securities, securities markets are
among the most heavily regulated markets in the United
States.2 Regulation of securities first flourished at the state
level in the 1910s, when states began enacting laws that
required the registration of a securities offering before the
sale of the security was permitted. The purpose of these so-
called "blue sky" laws was to allow state authorities to
prevent unknowing buyers from being defrauded into
buying securities that appeared valuable but in fact were
worthless.3 By 1933, all but one state had passed blue sky
laws; today, all fifty states, the District of Columbia, Guam,
and Puerto Rico have blue sky laws in force. See Louis Loss
& Joel Seligman, 1 Securities Regulation 40-41 (3d ed. Rev.
1998) (hereinafter, "Loss & Seligman").

Aggressive federal regulation of securities markets began
in the early 1930s with the passage of the Securities Act of
1933 and the Securities Exchange Act of 1934. Today, the
Securities and Exchange Commission ("SEC") administers
these and five other federal statutes, which altogether form
a complex web of federal regulations. See id. at 224-81.
Despite this complex federal scheme, Congress, the courts,
and the SEC have made explicit that federal regulation was
not designed to displace state blue sky laws that regulate
interstate securities transactions. See, e.g., 15 U.S.C.
S 77r(c) (1997) (preserving state jurisdiction "to investigate
and bring enforcement actions with respect to . . . unlawful
conduct by a broker or dealer") (National Securities Markets
Improvement Act of 1996); Merrill Lynch, Pierce, Fenner &
Smith, Inc. v. Ware, 414 U.S. 117, 137 (1973) ("Congress
_________________________________________________________________

2. Securities are the collective term used to describe documents that
represent ownership in a company or a debt. Common examples include
stocks, bonds, notes, convertible debentures, and warrants. See Black's
Law Dictionary 1215 (5th ed. 1979); Joseph C. Long, 12 Blue Sky Law
S 2.01 (1997).

3. See generally Jonathan R. Macey & Geoffrey P. Miller, Origin of the
Blue Sky Laws, 70 Tex. L. Rev. 347 (1991).

4
intended to subject [securities] exchanges to state
regulation that is not inconsistent with the federal [laws].");
Loss & Seligman at 275-281. Although the enactment of
the National Securities Markets Improvement Act of 1996
narrowed the role of state blue sky laws by expanding the
range of federal preemption, federal and state regulations
each continue to play a vital role in eliminating securities
fraud and abuse. See Loss & Seligman at 60-62; Manning
G. Warren III, Reflections on Dual Regulation of Securities
Regulation: A Case Against Preemption, 25 B.C. L. Rev. 495,
497, 501-27 (1984) (describing how Congress, the courts,
and the SEC have expressly authorized the enforcement of
state blue sky laws).

B.

Among blue sky laws, the most common regulatory
approach is the mixed disclosure and merit regulation
scheme offered by the Uniform Securities Act ("Uniform Act").4
Drafted in large part by the late Professor Louis Loss, the
Uniform Act has been adopted with some modification in
nearly forty states, including New Jersey. See N.J.S.A.
S 49:3-47 to 76. The Act contains three essential parts:
provisions requiring the registrations of securities sold
within the state; provisions requiring the registration of
persons involved in the securities industry; and various
antifraud provisions. See id; see also Joseph C. Long, 12
Blue Sky Law S 1.07 (1997) (hereinafter, "Long").

This case raises a constitutional challenge to N.J.S.A.
S 49:3-60 ("S 60"), which is New Jersey's codification of the
portion of the Uniform Act that makes it "unlawful for any
security to be offered or sold in this State" unless the
security is either registered by state authorities, is exempt
_________________________________________________________________

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

5
under N.J.S.A. S 49:3-50, or is a federally covered security.5
When read in conjunction with N.J.S.A. S 49:3-51(c), which
states that "an offer to sell or buy is made in this State . . .
when the offer . . . originates in this State," S 60 grants New
Jersey regulatory authorities the power to regulate the offer
or sale of all non-exempt, non-covered securities whenever
the offer is made within the state of New Jersey. Under
N.J.S.A. S 49:3-64 and the 1985 amendments to the New
Jersey statute, this authority permits the chief of the New
Jersey Bureau of Securities ("Bureau") to exercise broad
powers to regulate sale of such securities in New Jersey
when it is deemed in the public interest and various
statutory requirements have been met.

II.

A.

A.S. Goldmen & Co. is a securities broker-dealer with its
sole office located in Iselin, New Jersey.6 At the time of
proceedings before the District Court, Goldmen's sole office
was located in New Jersey. Since that time, it has opened
at least one other office out of state.

Goldmen specializes in underwriting the public offerings
of low priced, over-the-counter securities, and then selling
those securities in the secondary market. During thefirst
several months of 1996, Goldmen planned the initial public
_________________________________________________________________

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

It is unlawful for any security to be offered or sold in this State
unless:
(a) The security or transaction is exempt under section 3 of
P.L.1967, c. 93 (C.49:3-50);
. . .
(e) The security is registered under this act; or
(f) It is a federal covered security for which a notice filing and
fees
have been submitted as required by section 14 of this act (C.49:3-
60.1).

6. A "broker-dealer" is defined by the Act as "any person engaged in the
business of effecting or attempting to effect transactions in securities
for
the accounts of others or for his own account." N.J.S.A. S 49:3-49(c).

6
offering of Imatec, Ltd. ("Imatec"). Imatec is a Delaware
corporation, located in New York, that was formed in 1988
to develop, design, market, and license image enhancement
technologies. Goldmen planned for the Imatec securities to
be traded as a NASDAQ Small Cap stock because such
stocks are exempt from initial federal registration
requirements, see 15 U.S.C. S 77(d) (1997). The primary
regulation of the Imatec security during the first 25
calendar days of the offering would occur at the state level.
See 17 C.F.R. S 230.174(d) (1992). Accordingly, in May
1996, Goldmen concurrently filed registration statements
with the SEC, and also attempted to register the offering
"by qualification" with state regulatory authorities in over a
dozen states, including New Jersey.7

The prospectus filed by Goldmen with the New Jersey
Bureau of Securities ("the Bureau") listed Goldmen as the
sole underwriter, and also indicated that Goldmen would
own the shares to be offered to the public. Reviewing
Goldmen's application, the Bureau expressed various
concerns regarding the Imatec offering to Goldmen's
counsel. Although the Bureau was not prepared to make
allegations of fraud, it had already been investigating
Goldmen's business practices at that time, and was
concerned that the combination of Goldmen's practices and
the bleak financial prospects of Imatec made the offering a
high-risk investment that was likely to be associated with
abusive and manipulative sales practices.

On August 7, 1996, the Bureau informed Goldmen's
counsel that it was considering the issuance of a stop order
that would block the Imatec offering from being registered
in New Jersey. Goldmen's counsel and the Bureau then
entered into negotiations concerning the future of the
Imatec offering. On October 23, 1996, these negotiations
_________________________________________________________________

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

7
resulted in a Consent Order signed by the CEO of Imatec
and the Bureau chief. According to the Consent Order,
Goldmen withdrew its application to register the Imatec
offering in New Jersey, and agreed that the Imatec offering
did not qualify for N.J.S.A. S 49:3-50(b) exemptions to the
registration rule of S 60. Goldmen was permitted to make
unsolicited sales from New Jersey or to sell to certain
financial institutions or to other broker-dealers. However,
the Consent Order specifically denied Goldmen exemptions
that would have allowed it to solicit members of the public
to purchase Imatec stock in the secondary market. App.
38-41; App. 156-57.

Five days after Goldmen entered into the Consent Order,
on October 28, 1996, the registration statement that
Goldmen had filed with the SEC became effective. 8 As of
that date, Goldmen had managed to register the Imatec
offering in sixteen states, but had been forced to withdraw
its registration in several others, including New Jersey.

On the morning of October 29, 1996, Goldmen
commenced the initial public offering from its office in
Iselin, New Jersey. By telephone, Goldmen solicited sales to
individuals outside of New Jersey, but did not solicit any
sales to individuals within New Jersey. By 3 p.m. of that
day, Goldmen had sold the entire public offering. 9
Subsequently, Goldmen continued to buy and sell Imatec
securities in the interdealer market from its New Jersey
office.
_________________________________________________________________

8. Registration with the SEC does not imply SEC approval of the offering.
See 15 U.S.C. S 77w (1997) ("[T]he fact that the registration statement
for
a security has been filed or is in effect . . . shall [not] be deemed a
finding by the Commission that the registration statement is true and
accurate on its face . . . , or be held to mean that the Commission has
in any way passed upon the merits of, or given approval to, such
security.")

9. We do not regard this case as moot despite the fact that the Imatec
offerings are concluded. We are concerned that this kind of case
presents a problem that may be capable of repetition but avoiding review
with respect to Goldmen. Weinstein v. Bradford, 423 U.S. 147 (1975).
Due to the nature of Goldmen's business, this same problem may be
confronted in the future.

8
The Bureau learned of Goldmen's sales on November 7,
1996. Because the window for state regulation of the
Imatec offering closed 25 days after the offering began,10 the
Bureau acted immediately, notifying Goldmen that it
believed that the sales violated the Securities Act and the
Consent Order. Goldmen took the position that its sales
violated neither state law nor the consent order, and
informed the Bureau that it intended to continue to buy
and sell securities from its New Jersey office. The Bureau
responded by issuing a Cease and Desist Order dated
November 12, 1996, which ordered Goldmen to "cease and
desist from the solicitation of customers, offer and sale of
Imatec in or from the State of New Jersey to any members
of the public." App. 91.

B.

On the same day that the Bureau issued the Cease and
Desist Order, Goldmen filed this declaratory judgment
action against the Bureau in federal district court.
Goldmen's complaint claimed that "the New Jersey
Securities Act, as applied to securities that were not
registered or exempt from registration in New Jersey and
were sold by brokers located in New Jersey to residents of
states (other than New Jersey) in which the securities were
qualified for sale, violates the Commerce Clause of the
United States Constitution." The complaint also alleged that
even if the Securities Act was constitutional, the Act and
the Consent Order did not apply to block Goldmen's sales
of Imatec securities from New Jersey. According to
Goldmen, the sole legal effect of the Act and the Consent
Order was to prohibit Goldmen from selling the securities
to buyers located in New Jersey.

The district court issued an Order to Show Cause, and
held a hearing on November 20, 1996.11 The district court
_________________________________________________________________

10. Under 15 U.S.C. S 77r(b)(4)(A) and 17 C.F.R. S 230.174(d), the Imatec
security became a "covered security" 25 days after the initial public
offering. At that time, state regulation was preempted. See 15 U.S.C.
S 77r(a)(1)(A) (1997).

11. At the hearing, the Bureau argued that Goldmen's federal action
should be stayed under the abstention principles enunciated in Younger

9
issued a preliminary injunction the same day, enjoining the
Bureau from taking any action that would prohibit
Goldmen from "soliciting, offering or selling securities that
are not registered or exempt from registration in New Jersey
to residents of states (other than New Jersey) in which the
securities are qualified for sale." App. 402-03.

The case then proceeded to cross-motions for summary
judgment. On August 21, 1997, the district court granted
Goldmen's motion for summary judgment and denied the
Bureau's summary judgment motion. The sole issue
addressed was whether the New Jersey Uniform Securities
Law violated the dormant commerce clause by authorizing
the Bureau to block the sale of securities from New Jersey
to buyers in other states where the security was registered.
The district court concluded that it did. According to the
district court, the law directly regulated interstate
commerce because it effectively allowed the Bureau"to
impose New Jersey securities regulations onto other states."
The district court argued that "[t]o allow the Bureau to
preclude consumers in other states from receiving
solicitations to purchase securities which their own state
regulators have deemed appropriate for purchase is, in
essence, to allow the Bureau to substitute its own
regulatory judgment for that of other states." Further, the
district court argued that absent allegations of fraud, the
Bureau had no interest in regulating such transaction.
Accordingly, the New Jersey Uniform Securities Law
imposed an excessive burden on interstate commerce in
relation to New Jersey's local benefits. App. 581 (citing Pike
v. Bruce Church, 397 U.S. 137 (1970)).

The Bureau filed a timely appeal.
_________________________________________________________________

v. Harris, 401 U.S. 37, 91 S. Ct. 746 (1971). The district court rejected
this argument. App. 446. Because the Bureau has chosen not to raise
this issue on appeal, we will not address it further. Compare Ohio Bureau
of Employment Services v. Hodory, 431 U.S. 471, 477-80, 97 S.Ct. 1898,
1904 (1977).

10
III.

A. Legal Framework

The Supreme Court has long construed the Commerce
Clause as implying a judicial power to invalidate state laws
that interfere improperly with interstate commerce. See,
e.g., Cooley v. Board of Wardens, 53 U.S. (12 How.) 299
(1851). One consistent strain of these cases authorizes
courts to invalidate state regulations when their
extraterritorial impact is so great that their "practical effect
. . . is to control conduct beyond the boundaries of the
state." Healy v. The Beer Institute, 491 U.S. 324, 336, 109
S.Ct. 2491, 2499 (1989). As Justice Cardozo explained in
Baldwin v. G.A.F. Seelig, 294 U.S. 511, 523, 55 S.Ct. 497,
500 (1935), such a power is necessary to prevent states
from applying "parochial" laws that can bring about "a
speedy end of our national solidarity." "The Constitution,"
Justice Cardozo stated, "was framed upon the theory that
the peoples of the several states must sink or swim
together, and that in the long run prosperity and salvation
are in union and not division." Id.

According to these "extraterritorial effects" cases, a state
may not attempt to regulate commerce that takes place
"wholly outside" of its borders: such a "projection of one
state regulatory regime into the jurisdiction of another
State" is impermissible. Healy, 491 U.S. at 336-37; 109
S. Ct. at 2499. Under this rubric, the Supreme Court has
invalidated state laws that restricted interstate movement of
goods based on the price paid for them in out-of-state
transactions. See, e.g., Baldwin, 294 U.S. at 521, 55 S. Ct.
at 499 (invalidating New York law that banned the
importation of milk into New York when the price paid
outside of New York to the out-of-state producer was lower
than that permitted under then-existing laws regulating
milk purchases from New York producers); Lemke v.
Farmers Grain Co., 258 U.S. 50, 61, 42 S. Ct. 244, 248
(1922) (invalidating North Dakota law requiring exported
wheat to be sold outside of North Dakota at price set by
North Dakota state inspector). Similarly, the Court has
struck down state laws that prohibited the importation of
out-of-state goods unless the importer guaranteed that its

11
in-state prices were no higher than elsewhere. See, e.g.,
Healy, 491 U.S. at 337, 109 S. Ct. at 2499 (invalidating
Connecticut law prohibiting beer imports unless seller
guaranteed that prices offered in Connecticut were no
higher than in neighboring states); Brown-Forman Distillers
Corp. v. New York State Liquor Auth., 476 U.S. 573, 579,
106 S. Ct. 2080, 2084 (1986) (invalidating New York law
requiring liquor importers to affirm that prices offered to
New York wholesalers were lowest nationwide). Finally, the
Court has invalidated laws granting officials in one state
the authority to block multistate transactions that only
marginally involve in-state interests. See Edgar v. MITE
Corp., 457 U.S. 624, 643-46, 102 S. Ct. 2629, 2641-42
(1982) (invalidating Illinois law that authorized Illinois
officials to block substantively unfair takeovers of
multistate companies that had connections to Illinois and
also other states).

Of course, these cases do not establish that the states
are forbidden categorically to regulate transactions that
involve interstate commerce. See H.P. Hood & Sons v. Du
Mond, 336 U.S. 525, 532-33, 69 S. Ct. 657, 662 (1949)
(Jackson, J.) (recognizing that States have "broad power . . .
to protect its inhabitants against . . . fraudulent traders . . .
even by use of measures which bear adversely upon
interstate commerce"). Rather, states are permitted to
regulate in-state components of interstate transactions so
long as the regulation furthers legitimate in-state interests.
A particularly relevant example of this is Hall v. Geiger-
Jones Co., 242 U.S. 539, 37 S. Ct. 217 (1917), and its
companion cases, Caldwell v. Sioux Falls Stock Yards Co.,
242 U.S. 559, 37 S.Ct. 224 (1917) and Merrick v. N.W.
Halsey & Co., 242 U.S. 568, 37 S.Ct. 227 (1917)
(collectively, the "Blue Sky Cases"). In the Blue Sky Cases,
the Court considered dormant commerce clause challenges
to then-recently enacted Blue Sky laws in Ohio, South
Dakota, and Michigan. Although the three statutes differed
somewhat, each granted state securities commissions the
authority to block the in-state sale or purchase of
unlicensed securities. The laws were challenged both by
unlicensed in-state securities sellers and the out-of-state
purchasers who had traveled in-state to make their
purchases, but the Court rejected their claims that the laws

12
violated the dormant commerce clause. The key to the laws'
constitutionality, the Court held, was that "[t]he provisions
of the law . . . apply to dispositions of securities within the
state." Hall, 242 U.S. at 557, 37 S. Ct. at 223 (emphasis in
original). By limiting the scope of the statute to dispositions
of securities "within the State," the Court announced, the
states had merely enacted "police regulation[s]," that
"affect[ed] interstate commerce . . . only incidentally." Id. at
558, 37 S. Ct. at 223; see also CTS Corp. v. Dynamics
Corp., 481 U.S. 69, 93, 107 S.Ct. 1637, 1651-52 (1987)
(rejecting challenge by out-of-state company to Indiana law
conditioning acquisition of corporate control of Indiana
corporation on approval of a majority of the pre-existing
disinterested shareholders, reasoning that law regulated in-
state corporations); cf. Shafer v. Farmers' Grain Co, 268
U.S. 189, 200, 45 S. Ct. 481, 485 (1925) (invalidating North
Dakota law that regulated in-state handling of wheat
headed for interstate commerce that served no legitimate
in-state interests).

B. Territoriality

As these cases indicate, the constitutionality of state
regulations of interstate commerce depends largely on the
territorial scope of the transaction that the state law seeks
to regulate. If the transaction to be regulated occurs "wholly
outside" the boundaries of the state, the regulation is
unconstitutional. MITE Corp, 457 U.S. at 642. If the
transaction occurs "within" the boundaries of the state, it is
constitutional so long as the regulation furthers legitimate
in-state interests. See id. at 643-46; CTS Corp, 481 U.S. at
93.

Therefore, the first issue we must address is the
territorial scope of the transaction that New Jersey has
attempted to regulate. The question is, what is the
territorial basis of a contract entered into by telephone
between a New Jersey broker soliciting sales of Imatec
securities from New Jersey, and an out-of-state buyer who
agrees to purchase them outside of New Jersey? More
particularly, can it fairly be said that such a transaction
occurs "wholly outside" New Jersey? As this is a legal
question, our review is plenary. See Ciarlante v. Brown &

13
Williamson Tobacco Corp., 143 F.3d 139, 145 (3d Cir.
1998).

Goldmen and the Bureau offer divergent views ofS 60's
territorial scope. Goldmen argues that S 60 permits New
Jersey to reach out beyond its borders and block willing
buyers from completing transactions authorized by their
home states. According to Goldmen, "the effects of the
Bureau's application of Section 60 is not to regulate in-
state brokers, but to preclude out-of-state residents from
purchasing a product deemed appropriate for sale by their
own regulators." Br. at 20. Goldmen suggests that the
offer's origin in New Jersey is not relevant to the
transaction's territoriality, because "the `practical effect' of
permitting New Jersey to bar the sale of securities from
New Jersey into states where those securities have been
qualified for sale is that those out-of-state residents will be
precluded altogether from receiving the opportunity to
purchase these securities." Id. at 16.

The Bureau's position is that S 60 regulates the offering
of securities entirely within the state of New Jersey.
According to the Bureau,

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

Br. at 27.12 The Bureau concedes that S 60 may affect
interstate commerce, to the extent that sellers such as
Goldmen try to sell securities to buyers in other states.
However, the Bureau contends that this is merely an
indirect effect of what is essentially New Jersey's regulation
of New Jersey parties seeking to sell securities in New
Jersey.
_________________________________________________________________

12. Both amici, North American Securities Aministrators Association and
the Securities and Exchange Commission, support the position taken by
the New Jersey Bureau of Securities that S 60 does not violate the
dormant commerce clause.

14
In resolving this question, we begin by noting that
notions of the territorial scope of contracts between citizens
of different states have evolved in the past century. At one
time, it was fashionable to conceive of contracts between
diverse parties as being rooted in a single geographical
location, such as the place the offer was accepted. See, e.g.,
Joseph H. Beale, What Law Governs Validity of a Contract,
23 Harv. L. Rev. 260, 270-71 (1910). Under this traditional
approach, it was believed that when a contract offer made
in New Jersey was accepted in New York, the contract was
"made" in New York, and thus implicated New York's
sovereignty. See id; cf. Perrin v. Pearlstein, 314 F.2d 863,
867 (2d Cir. 1963).

The contrasting modern approach is to recognize that
contracts formed between citizens in different states
implicate the regulatory interests of both states. Thus,
when an offer is made in one state and accepted in another,
we now recognize that elements of the transaction have
occurred in each state, and that both states have an
interest in regulating the terms and performance of the
contract. See, e.g., General Ceramics Inc. v. Fireman's Fund
Ins. Co., 66 F.3d 647, 656-59 (3d Cir. 1995) (comparing the
regulatory interests of New Jersey and Pennsylvania to a
contract formed between a New Jersey company and a
Pennsylvania company in the course of determining
applicable law). See generally Joseph W. Singer, A
Pragmatic Guide to Conflicts, 70 B.U. L. Rev. 731, 785-802
(1990) (describing the regulatory interests of states in
contract disputes between diverse parties).

This notion that the sovereignty of both the state of the
offeror and offeree are implicated by contracts entered into
by citizens in different states is the key to understanding
the territorial scope of the contract between Goldmen and
the prospective buyers of Imatec in another state such as
New York. A contract between Goldmen in New Jersey and
a buyer in New York does not occur "wholly outside" New
Jersey, just as it does not occur "wholly outside" New York.
Rather, elements of the transaction occur in each state,

15
and each state has an interest in regulating the aspect of
the transaction that occurs within its boundaries.13

Accordingly, S 60 simply allows the Bureau to regulate its
"half" of the transaction-- the offer that occurs entirely
within the state of New Jersey-- and thus its territorial
scope is indistiguishable from that in Hall v. Geiger-Jones
Co., 242 U.S. 539, 37 S. Ct. 217 (1917), Caldwell v. Sioux
Falls Stock Yards Co., 242 U.S. 559, 37 S.Ct. 224 (1917)
and Merrick v. N.W. Halsey & Co., 242 U.S. 568, 37 S.Ct.
227 (1917).

Viewed in this light, Goldmen's view that S 60 violates the
dormant commerce clause because it projects its ban into
jurisdictions that would allow the transaction is logically
flawed and simply proves too much. If New Jersey seeks to
block Goldmen's offering but the buyer's state (say, New
York) would allow it, one state must prevail. One state can
in effect "force its judgment" upon the other. Under New
Jersey's Blue Sky law, New Jersey can block the
transaction even if New York would permit it.

Goldmen's alternative is no better, however: under its
view of the dormant commerce clause, New York's approval
would permit the transaction, over New Jersey's objection.
Thus, the difference between New Jersey's Blue Sky law
and Goldmen's proposal is simply the market's default rule:
should the transaction be allowed if either state permits, or
blocked if either side objects? Such questions of the
market's "structure" and its "method of operation" are quite
simply beyond the concern of the Commerce Clause, as
they "relate to the wisdom of the statute, not to its burden
on commerce." Exxon Corp. v. Governor of Maryland, 437
U.S. 117, 127-28 (1978).

C. Legitimate Interests

Having concluded that S 60 regulates the in-state
component of an interstate transaction, we next consider
whether the statute reasonably furthers a "legitimate
interest" within the boundaries of New Jersey. MITE Corp.,
_________________________________________________________________

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

16
457 U.S. at 644, 102 S. Ct. at 2641; CTS Corp., 481 U.S. at
93, 107 S. Ct. at 1651-52.

Goldmen claims that New Jersey has no legitimate
interest in regulating Goldmen's non-fraudulent sales to
out-of-state residents. If Goldmen's business practices are
manipulative, Goldmen argues, the harm will be suffered
entirely by out-of-state consumers. Br. at 29. Because the
protection of out-of-state consumers from potentially
manipulative sales practices is not New Jersey's legitimate
concern, Goldmen contends, its regulation of Goldmen's
non-fraudulent sales to out-of-state consumers does not
implicate any legitimate regulatory interests within the
state of New Jersey.

The Bureau responds by arguing that its regulation of in-
state sales of securities to out-of-state purchasers furthers
important New Jersey interests. We agree. In particular, we
consider two legitimate state interests to be particularly
strong ones. First, preventing New Jersey companies from
offering suspect securities to out-of-state buyers helps
preserve the reputation of New Jersey's legitimate securities
issuers. States that have failed to monitor out-of-state sales
by in-state broker-dealers have suffered in the past, as
their legitimate broker-dealers suffered from association
with suspect firms offering questionable securities. See
Long, S 3.04[3][a] at 3-51 to 3-52 (providing examples); see
also Stevens v. Wrigley Pharma. Co., 154 A. 403, 403 (N.J.
Ch. Div. 1931) (noting that New Jersey's interest in
regulating in-state offers to out-of-state buyers is"not so
much to protect the citizens of other states, as to prevent
this state from being used as a base of operations for
crooks marauding outside the state."); Simms Inv. Co. v.
E.F. Hutton & Co., 699 F. Supp. 543, 545 (M.D.N.C. 1988)
("[T]he laws protect legitimate resident issuers by exposing
illegitimate resident issuers."). Although this state interest
is heightened when the state can prove that the in-state
firm has engaged in outright fraud, the interest is
nonetheless legitimate when the state seeks to block sales
of securities that it believes might be associated with
dubious or manipulative sales practices. The difference
between a state's (i.e., New Jersey's) interest in preventing
fraud and preventing questionable practices is a difference
in degree, not a difference in kind.

17
The dissent contends that absent proof of actual fraud,
New Jersey has an insufficient interest in regulating
securities dealers who sell to out-of-state buyers. It is
undisputed that the purpose of securities registration laws
is to prevent fraud before it happens, and S 60 serves such
a prophylactic purpose. Merrick v. N.W. Halsey & Co., 242
U.S. 568, 587 (1917);14 Caldwell v. Sioux Falls Stock Yards
Co., 242 U.S. 559, 564 (1917) (upholding Blue Sky Law
designed "to prevent fraud in the sale and disposition of
stocks, bonds or other securities sold or offered for sale
within the state"); Hall v. Geiger-Jones Co., 242 U.S. 539,
551 (1917) (upholding Blue Sky Law designed to "prevent
deception and save credulity and ignorance from
imposition"); Cola v. Terzano, 322 A.2d 195, 198 (N.J.
Super. Ct. Law Div. 1974) (providing that the New Jersey
Uniform Securities Law is intended to protect the
uninitiated and to prevent frauds upon the public at large),
aff'd sub nom. Cola v. Packer, 383 A.2d 460 (N.J. Super. Ct.
App. Div. 1974); New Jersey v. Russell, 291 A.2d 583, 587
(N.J. Super. Ct. App. Div. 1972) (recognizing that the sale
of securities is a specialized field of activity in which the
potential for abuse and financial injury is great); Enntex Oil
& Gas Co. (of Nevada) v. Texas, 560 S.W.2d 494 (Tex. Civ.
App. 1977, writ ref'd n.r.e.), appeal dismissed for want of a
substantial federal question, 439 U.S. 961 (1978). New
Jersey's regulation of sales by in-state brokers to out-of-
state buyers serves the legitimate purpose of preventing
fraudulent transactions.

Regulating in-state offers to out-of-state buyers also
serves New Jersey interests by protecting New Jersey
residents from dubious securities that enter the state in the
secondary market. This risk is particularly great because a
_________________________________________________________________

14. [W]e think the [securities registration] statute under review is
within
the power of the state. It burdens honest business, it is true, but
burdens it only that under its forms dishonest business may not be
done. This manifestly cannot be accomplished by mere declaration;
there must be conditions imposed and provision made for their
performance. Expense may thereby be caused and inconvenience,
but to arrest the power of the state by such considerations would
make it impotent to discharge its function.

Id. at 587 (emphasis added).

18
broker-dealer such as Goldmen could otherwise delay or
even avoid the Bureau's scrutiny through an initial sale to
a cooperative party outside New Jersey. Because there is no
filing requirement for secondary transactions, Goldmen
could arrange to "sell" a security to a friendly out-of-state
party, immediately buy back the security, and then sell it
freely to New Jersey residents using possibly questionable
sales practices. App. 77-78.15 New Jersey's most effective
means of preventing such an undesirable result would be to
block the initial public offering. See Long, S 3.04[3][b-c] at
3-52 to 3-53.

In conclusion, the Bureau's application of S 60 to
Goldmen's Imatec offering furthers two legitimate state
interests: preserving the reputation of New Jersey broker-
dealers, and protecting New Jersey buyers in the secondary
market.

IV.

Because the Bureau's application of S 60 regulates the in-
state portion of an interstate transaction and furthers
legitimate in-state interests, the application ofS 60 to
regulate the Imatec offering does not violate the dormant
commerce clause. In so holding, we note that our
conclusion is in accordance with the overwhelming majority
of courts that have considered dormant commerce clause
challenges to blue sky laws. See, e.g., Hall, 242 U.S. at 557;
Enntex Oil & Gas Co. v. Texas, 560 S.W.2d 494 (Tex. Ct.
App. 1977), appeal dismissed for lack of a substantial
federal question, 439 U.S. 961 (1978); Chrysler Capital
Corp. v. Century Power Corp., 800 F. Supp. 1189, 1194
(S.D.N.Y. 1992); Upton v. Trinidad Petroleum Corp., 468 F.
Supp. 330, 336 (N.D.Ala. 1979), aff'd on other grounds, 652
F.2d 424 (5th Cir. 1981); Oil Resources v. Florida, 583 F.
Supp. 1027 (S.D.Fla. 1984), aff'd without op., 746 F.2d 814
(11th Cir. 1984); see also Loss & Seligman at 39-40 ("On
the whole, it seems fair to say that there no longer need be
_________________________________________________________________

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

19
any substantial constitutional doubts about blue sky
provisions.").16

Indeed, the established heritage and near universality of
the provision that Goldmen has challenged itself
underscores its constitutionality. See Healy, 491 U.S. at
336-37, 109 S. Ct. at 2499. Goldmen has challenged a state
provision that is an established strand in the legal fabric of
securities regulation. The power that Goldmen claims would
unduly burden interstate commerce is one that most states
have long exercised, and that Congress has for decades
expressly allowed to continue. This is not the sort of
"parochial" state power that Justice Cardozo warned of in
Baldwin, the broad exercise of which "would .. . invite a
speedy end of our national solidarity." Baldwin, 294 U.S. at
523, 55 S.Ct. at 500.

We will therefore reverse the order of the district court
dated August 21, 1997, and remand for proceedings
consistent with this opinion.
_________________________________________________________________

16. Goldmen relies heavily on Arizona Corp. Comm'n v. Media Products,
Inc., 158 Ariz. 463, 763 P.2d 527 (Ariz. App. 1988), the one case that
runs counter to the many upholding state blue sky laws against dormant
commerce clause challenges. Media Products is distinguishable, however,
because in that case Arizona sought to bar an Arizona company from
selling a security outside of Arizona through an agent outside of Arizona
to a buyer who was also outside of Arizona. In other words, the only
connection the transaction had with Arizona was that the principal place
of business of the seller was located there. See id. at 464-65; 763 P.2d
at 528-29. ("Sales of the entire issue were negotiated out-of-state[,]
solely
by [an] out-of-state underwriter . . . . No sales or offers of sale were
made
in Arizona."). Because the offer and acceptance took place entirely
outside of Arizona, Arizona's attempt to block the transaction was not an
effort to regulate the in-state component of an interstate transaction, as
is the case here.

20
McKEE, Circuit Judge, dissenting.

I respectfully dissent from the opinion of my colleagues.
The majority recognizes New Jersey's right to regulate that
portion of a multi-state transaction occurring within its
borders because "one state must prevail" in a dispute that
extends beyond its borders and involves residents of other
states. Maj. Op. at 16. The approach the majority uses
would be helpful to resolving a choice of law dispute, but it
is of only limited assistance in adjudicating this dispute
under the Commerce Clause. New Jersey does not allege
that Goldmen's sale of Imatec stock involved fraud, and the
district court concluded that fraud was not involved. See
Dist. Ct. Op. at 7 ("The Bureau does not advance a single
allegation of fraud"). Thus, the issue is not which state will
win, but whether New Jersey's interest here is sufficient to
allow it to prevent Goldmen from soliciting residents of
other states. The district court concluded, "the Bureau is
reaching out to prohibit a sale, not made to New Jersey
residents, which takes place in a national securities
market, and which is regulated by each state to protect its
own citizens." Id. The district court concluded that New
Jersey's interest was not sufficient to allow that result. I
agree, and would affirm the well reasoned decision of the
district court.

I.

My colleagues cite General Ceramics Inc. v. Firemen's
Fund Ins. Co., 66 F.3d 647, 656-59 (3rd Cir.) to justify the
conclusion that New Jersey's interest in regulating offers
made from within its borders justifies preventing Goldmen
from offering shares of Imatec to buyers residing in states
where that security is properly registered. Maj. Op. at 15.

In Firemen's Fund, the issue was

whether New Jersey or Pennsylvania law controls the
interpretation of an exception to a pollution-exclusion
clause when New Jersey has significant contacts with
the insurance contract and the insured but
Pennsylvania is the site of the hazardous waste site
giving rise to the liability for which coverage is sought.

21
Id., at 649. The dispute arose in a diversity case where we
applied New Jersey's choice of law rules to determine if the
law of New Jersey or Pennsylvania governed the
interpretation of an exception to a pollution-exclusion
clause in a comprehensive liability insurance policy. The
loss that gave rise to the dispute resulted from costs
incurred under the Comprehensive Environmental
Response Compensation and Liability Act ("CERCLA"). Our
analysis focused upon which state's law controlled"whether
the phrase `sudden and accidental' extended coverage for
the gradual discharge of pollution." Id., at 652. We held
that New Jersey law applied. Id. ("Based on the strong
public policy that underlies New Jersey's broad
interpretation of the pollution-exclusion exception,. . . New
Jersey law governs."). We reached that result because the
interests of Pennsylvania would not have been furthered by
applying its law to that particular dispute, whereas the
interests of New Jersey were furthered by applying the law
of New Jersey. Id., at 657.

That does not assist us here. The controversy here is not
merely between the conflicting regulations of two or more
states. Rather, this dispute focuses upon the impact of that
conflict upon interstate commerce. Nor, do I believe that the
Blue Sky Cases1 support the majority's conclusion.
Although those cases do address the scope of the
restrictions imposed on states under the Commerce Clause,
they do not address the precise issue that Goldmen raises.
In Merrick, (one of the Blue Sky Cases) the Court did not
even address whether the Blue Sky Law at issue violated
the Commerce Clause. Instead, the Court reserved that
question for decision in Geiger-Jones v. Hall - a companion
case to Merrick. See Merrick, 242 U.S. at 590. In Hall, the
Court reviewed an Ohio law that required sellers of
securities to obtain a license before offering any securities
for sale within the state. An Ohio securities broker with
clients in several states including Ohio (Geiger-Jones)
brought a multi-faceted challenge to the legality of Ohio's
licensing requirement. The primary assertion was that
_________________________________________________________________

1. Hall v. Geiger-Jones Co., 242 U.S. 539, 37 S. Ct. 217 (1917), Caldwell
v. Sioux Falls Stock Yards Co., 242 U.S. 559, 37 S.Ct. 224 (1917) and
Merrick v. N.W. Halsey & Co., 242 U.S. 568, 37 S.Ct. 227 (1917).

22
Ohio's licensing requirement was an improper exercise of
the state's police power. 242 U.S. at 548. The Court
concluded that the requirement was a valid means of
protecting against fraud, and noted that the
Commissioner's ability to deny or revoke a license was
qualified by a duty of good faith, and subject to judicial
review. Id., at 553. The Court reasoned:

The provisions . . . apply to dispositions . . . within the
state, and while information of those issued in other
states . . . is required to be filed, they are only affected
by the requirement of a license of one who deals in
them within the state. Upon their transportation into
the state there is no impediment, -- no regulation of
them or interference with them after they get there.
There is the exaction only that he who disposes of
them there shall be licensed to do so, and this only
that they may not appear in false character . . . and
this certainly is only an indirect burden upon them as
objects of interstate commerce, if they may be regarded
as such. It is a police regulation strictly, not affecting
them until there is an attempt to make disposition of
them within the state. Such regulations affect interstate
commerce in them only incidentally.

242 U.S. at 557-8 (emphasis added). Here, the regulation in
question has a far greater impact upon commerce outside
of the state. It prevents solicitation of residents of other
states and thereby has the practical effect of halting sales
to individual purchasers unless those purchasers know of
the securities and make Goldmen an unsolicited offer to
buy. In fact, the Bureau's entire justification for S 60 rests
upon its admitted desire to stop such solicitations, and
thereby stop solicited sales. Therefore, it is as misleading as
it is inaccurate to conclude that the extraterritorial affect of
S 60 is "incidental" and to uphold the prohibition as a
regulation of New Jersey's "half" of an interstate
transaction. See Maj. Op. at 16. Themajority states:

If New Jersey seeks to block Goldmen's offering but the
buyer's state (say, New York) would allow it, one state
must prevail. One state can in effect "force its
judgment" upon the other. . . . block the transaction
even if New York would permit it.

23
 Goldmen's alternative is no better, however: under its
view of the dormant commerce clause, New York's
approval would permit the transaction, over New
Jersey's objection. Thus, the difference between New
Jersey's Blue Sky law and Goldmen's proposal is simply
the market's default rule: should the transaction be
allowed if either state permits, or blocked if either side
objects? Such questions of the market's "structure" and
its "method of operation" are quite simply beyond the
concern of the Commerce Clause, as they "relate to the
wisdom of the statute, not to its burden on commerce."
Exxon Corp. v. Governor of Maryland, 437 U.S. 117,
127-28 (1978).

Maj. Op. at 16. However, applying S 60 to bar solicitation
where a security could otherwise be sold goes to the very
heart of the Commerce Clause. The question is not which
state's regulations will prevail, but whether either state has
an interest of sufficient gravity to allow it to enforce its
regulations in a manner that so effects interstate
commerce. The majority's analysis focuses only upon the
interest of the inconsistent regulatory schemes in the
relevant "competing" states. That approach fails to afford
proper recognition of the overriding federal interest that
must control under a Commerce Clause analysis. See
Kassell et al. v. Consolidated Freightways Corp. 450 U.S.
662 (1981).

In Kassell, an interstate trucking company sought to
strike down an Iowa law that limited the size of trucks on
interstate highways in Iowa to 50 feet. Consolidated
Freightways sought to invalidate the restriction arguing it
burdened interstate commerce. Neighboring states, and
nearly all other states in the west, and midwest allowed
trucks up to 65 feet in length on the portion of interstate
highways within their borders. Accordingly, interstate
trucking companies had to either use shorter trucks to
transport cargo through the midwest, route cargo around
Iowa, or switch trailers at the Iowa border in order to insure
that they did not exceed Iowa's length restriction. The Court
concluded that Iowa's proffered justification of safety was
tenuous at best because the record did not establish that
reducing trailer size had as direct an impact on the safety
of an interstate highway as Iowa claimed.

24
 Regulations designed for [safety] nevertheless may
further the purpose so marginally, and interfere with
commerce so substantially, as to be invalid under the
Commerce Clause. . . . In [Raymond Motor
Transportation, Inc. v. Rice, 434 U.S. 429, (1978)] we
declined to accept the State's contention that the
inquiry under the Commerce Clause is ended without
a weighing of the asserted safety purpose against the
degree of interference with interstate commerce. 434
U.S., at 443, 98 S.Ct., at 795. This "weighing" by a
court requires-- and indeed the constitutionality of the
state regulation depends on-- a sensitive consideration
of the weight and nature of the state regulatory
concern in light of the extent of the burden imposed on
the course of interstate commerce.

Id. at 670 (internal quotation marks omitted).

Although it appears at first that Kassell can easily be
distinguished from the facts before us, I believe the ease
with which Kassell can be dismissed is somewhat illusory.
The distinction stems from the tangible nature of the
commerce involved in Kassell rather than the quality of its
relationship to interstate commerce. The impact of a
regulation upon trucks moving on interstate highways is
readily apparent. The impact of S 60 upon commerce
outside of New Jersey is intangible, but nevertheless real.
New Jersey's interest here is not prevention of fraud
because fraud is not alleged. Thus, I disagree with the
weight the majority attaches to New Jersey's claimed
interest in protecting the reputation of securities dealers
that sell from offices in New Jersey. Maj. Op. at 17. New
Jersey's attempt to preserve S 60 by pointing to its
legitimate interest in preventing fraud is not unlike Iowa's
attempt to preserve its regulation by arguing that it
furthered the safety of its interstate highways in Kassell.
That argument was not supported by the record there, and
the fraud argument is not supported by the record here.
New Jersey can not prevent the sale of a security in a state
where the sale is proper merely by alleging a concern for
the speculative nature of Imatec, and alleging concerns
regarding Goldmen's business practices. If Goldmen (or any
other broker) engages in misleading and improper business

25
practices in the sale of Imatec stock (or any other stock or
commodity for that matter) New Jersey can certainly
investigate and remedy the situation under its police
powers. See Merrick, supra. The Bureau can prohibit fraud
in the offer, sale and purchase of securities, N.J.S.A. 49:3-
52; it can prohibit misleading filings, N.J.S.A. 49:3-54; it
can prohibit unlawful representations concerning
registration, N.J.S.A. 49:3-55; it can conduct investigations,
subpoena witnesses and require the production of evidence,
N.J.S.A. 49:3-68; and it can enjoin illegal conduct, N.J.S.A.
49:3-69.

Accordingly, the majority's citation to Stevens v. Wrigley
Pharma. Co., 154 A. 403, 403 (N.J. Ch. Div. 1931) (noting
that New Jersey's interest in regulating in-state offers to
out-of-state buyers is "not so much to protect the citizens
of other states, as to prevent this state from being used as
a base of operations for crooks marauding outside the
state."), and Simms Inv. Co. v. E.F. Hutton & Co., 699 F.
Supp. 543, 545 (M.D.N.C. 1988) ("[T]he laws protect
legitimate resident issuers by exposing illegitimate resident
issuers."), is misplaced. See Maj. Op. at 17. If that is New
Jersey's interest here, let the Bureau allege and prove
fraud. We are far too quick to allow New Jersey to proceed
as though it had established a fraud it is not even alleging.
We ought not rest our decision here upon concerns that
arise from insinuations and implications about unproven,
and unalleged, conduct on the part of Goldmen.

The majority also relies upon New Jersey's ability to
regulate "in-state offers to out-of-state buyers" stating that
such an interest "also serves New Jersey interests by
protecting New Jersey residents from dubious securities
that enter the state in the secondary market." Maj. Op. at
18. Yet, S 60 does not do that. Goldmen can solicit sales of
Imatec shares to institutional buyers, and other broker-
dealers no matter where they are located. Similarly, he can
sell these shares to individuals in New Jersey and
elsewhere so long as he does not solicit the buyer. Once
any such sales occur, the shares are in the secondary
market and Goldmen is no longer restrained by S 60.2
_________________________________________________________________

2. The Bureau takes the position that individuals who make an
unsolicited offer to buy from Goldmen, and institutional buyers and

26
II.

The Supreme Court "has adopted what amounts to a two-
tiered approach to analyzing state economic regulation
under the Commerce Clause." Brown-Forman Distillers
Corp. v. New York State Liquor Authority, 476 U.S. 573,
578-79 (1986). "When a state statute directly regulates or
discriminates against interstate commerce, or when its
effect is to favor in-state economic interests over out-of-
state interests, [the Supreme Court] has generally struck
down the statute without further inquiry." Id. at 579.
"When, however, a statute has only indirect effects on
interstate commerce and regulates evenhandedly, [the
Court] has examined whether the State's interest is
legitimate and whether the burden on interest commerce
clearly exceeds the local benefits." Id. (citing Pike v. Bruce
Church, Inc., 397 U.S. 137, 142 (1970)).

Although I believe a strong case can be made that S 60
falls within the first tier of inquiry and therefore could be
struck down as a per se violation of the Commerce Clause,
I think our inquiry should, more appropriately, be
conducted under the Pike balancing test that guides inquiry
under the second tier.3

Although the majority does not directly refer to Pike v.
Bruce Church, it is obvious that, by discussing New Jersey's
_________________________________________________________________

other broker-dealers are better informed. The Bureau reasons that
extremely risky securities will, therefore, not enter New Jersey via the
secondary market as they won't be sold in the first place. However, these
better informed buyers may well purchase shares of even the riskiest
stock based upon a belief that the risk is offset by the selling price,
and
the potential for greater profit. For a discussion of the various theories
of how risk, information about an issuer, and potential profit are
factored into the selling price of shares of stock, see Robert G. Newkirk,
Comment, Sufficient Efficiency: Fraud on the Market in the Initial Public
Offering, 58 U. Chi. L. Rev. 1393 (1991).

3. The Supreme Court has "recognized that there is no clear line
separating the category of state regulation that is virtually per se
invalid
under the Commerce Clause, and the category subject to the Pike v.
Bruce Church balancing approach." Brown-Forman Distillers Corp. v. New
York State Liquor Authority, 476 U.S. at 578-79."In either situation the
critical consideration is the overall effect of the statute on both local
and
interstate activity." Id.

27
local interests, it is engaging in a balancing of interests as
required by Pike. In Pike, the Court wrote:

Where the statute regulates even-handedly to
effectuate a legitimate local public interest, and its
effects on interstate commerce are only incidental, it
will be upheld unless the burden imposed on such
commerce is clearly excessive in relation to the local
putative benefits. If a legitimate local purpose is found,
then the question becomes one of degree. And the
extent of the burden that will be tolerated will of course
depend on the nature of the local interest involved, and
on whether it could be promoted as well with a lesser
impact on interstate activities. Occasionally the Court
has candidly undertaken a balancing approach in
resolving these issues, but more frequently it has
spoken in terms of "direct" and "indirect" effects and
burdens.

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

Moreover, a state cannot impose its regulatory scheme on
another state in an effort to "control conduct beyond the
boundaries of the state." Healy v. Beer Institute, 491 U.S.
324, 326 (1989). This prohibition against extraterritoriality
"reflect[s] the Constitution's special concern both with the
maintenance of a national economic union unfettered by
state-imposed limitations on interstate commerce and with
the autonomy of the individual states with their respective
spheres." Id. The Supreme Court has summarized the
application of the limitations inherent in the Commerce
Clause as follows:

[O]ur cases concerning the extraterritorial effects of
state economic regulation stand at a minimum for the
following propositions: First, the Commerce Clause . . .
precludes the application of a state statute to
commerce that takes place wholly outside of the State's
borders, whether or not the commerce has effects
within the State. . . . Second, a statute that directly
controls commerce occurring wholly outside the
boundaries of a State exceeds the inherent limits of the
enacting State's authority and is invalid regardless of
whether the statute's extraterritorial reach was

28
 intended by the legislature. The critical inquiry is
whether the practical effect of the regulation is to
control conduct beyond the boundaries of the State.
Third, the practical effect of the statute must be
evaluated not only by considering the consequences of
the statute itself, but also by considering how the
challenged statute may interact with the legitimate
regulatory regimes of other States and what effect
would arise if not one, but many or every, State
adopted similar legislation. Generally speaking, the
Commerce Clause protects against inconsistent
legislation arising from the projection of one state
regulatory regime into the jurisdiction of another.

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

I agree that Goldmen's telephone solicitation of out-of-
state buyers for shares of Imatec would not be a
transaction occurring "wholly outside" of New Jersey.
However, the majority's view that the Bureau is only
regulating its "half" of a transaction by prohibiting Goldmen
from soliciting out-of-state buyers, see Maj. Opn. at 16, is
accurate in theory, but not accurate in the jurisprudential
reality of the Commerce Clause. Goldmen is not the issuer
of these securities. It is only the underwriter. Imatec, a
Delaware corporation whose main office is in New York, is
the issuer. Imatec's only connection with New Jersey is that
its offering was underwritten by a broker-dealer who
happens to be located there, and that broker dealer
planned to solicit out-of-state sales from its New Jersey
office. It may be reasonably assumed that out of state
buyers would purchase these shares from funds held in
financial institutions outside of New Jersey, and that any
profits would be deposited into those same financial
institutions. Moreover, the growth and fiscal strength of
Imatec, the Delaware corporation, is related to the value of
its shares. Thus, New Jersey's only connection with this
interstate transaction lies in the fortuitous circumstance
that a broker-dealer would be sitting at a desk somewhere
in New Jersey making telephone calls to residents of the 16
states where Imatec securities are appropriately registered
and authorized for purchase.

29
Goldmen has satisfied the registration requirements of 16
states and those states allow their residents to be solicited
to purchase shares of Imatec. Each of those states could
have enacted a regulatory scheme that only allowed the
sale of securities properly registered in the state where the
seller maintains its principal office. None of the 16 states
have chosen to do so. Our holding has the practical effect
of reading S 60 into the regulations of each of those states
despite the absence of such a restriction in the regulatory
schemes of the 16 states. The majority concludes that this
result is consistent with the Commerce Clause because it
furthers two "particularly strong" local interests, viz.,
preserving the reputation of New Jersey broker-dealers and
protecting New Jersey buyers in the secondary market. Maj.
Opn. at 17-19. My colleagues can reach this conclusion by
viewing S 60 as having only an "incidental" impact on
interstate commerce. As I state above, S 60 imposes an
absolute ban on interstate commerce that consists of
soliciting individual buyers of Imatec stock from New
Jersey. If we analyzed the regulation from the perspective of
that absolute ban on the solicited sale of Imatec securities
to residents of the states where the securities have been
approved for sale, the burden on interstate commerce
would be far more substantial than the majority suggests.

However, even assuming arguendo that the regulations at
issue here have only an "incidental" effect on interstate
commerce, New Jersey's interest is still not sufficient to
justify prohibiting solicitations in 16 states where these
securities are registered. I believe that finding such an
interest requires more than the asserted need to protect
potential purchasers residing elsewhere from the risks of
penny stocks and sellers such as Goldmen. It requires
some showing that the interests New Jersey seeks to
further would be advanced by applying S 60 to solicitations
of Imatec. If the Bureau can establish that Goldmen is
engaging in false and misleading sales practices or fraud,
New Jersey has an interest sufficient to survive scrutiny
under the Commerce Clause. But, the Bureau concedes
that "[t]his is not a fraud case." App. at 558. Therefore, I
am at a loss to understand how the majority can conclude
on the record before us that New Jersey has shown a
"particularly strong" interest.

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Since New Jersey's interest absent fraudulent business
activities is minimal at least, the federal interests are
paramount. It is not a question of allowing one state's
regulatory scheme to prevail over that of another state. "The
balance here must be struck in favor of the federal
interests." Kassell, 450 U.S. at 667. Accordingly, I believe
we should affirm the decision of the district court.

A True Copy:
Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

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