A.S. Goldmen & Company, Inc. v. New Jersey Bureau of Securities

163 F.3d 780 (3rd. Cir. 1999)
  • Opinion Date: January 7, 1999

BROKER-DEALERS; REGULATION—New Jersey has the right to apply its securities laws to the sale or offering of securities when made by New Jersey broker-dealers even if the securities are only offered or sold to out-of-state buyers.

A securities broker-dealer with its sole office in New Jersey specialized in underwriting public offerings of low priced, over-the-counter securities and then selling those securities in the secondary market. In one instance, it planned to offer an issuer’s securities to be traded as a NASDAQ Small Cap Stock because such stocks are exempt from initial federal registration requirements. The primary regulation of such a security during the first 25 calendar days of the offering occurs at the state level. The dealer qualified the stock in 16 jurisdictions, but not in New Jersey. When the initial public offering commenced from its office in New Jersey, it solicited sales, by telephone, exclusively to individuals residing outside New Jersey. When it sold the entire public offering, it continued to buy and sell the securities in the interdealer market from its New Jersey office. When the New Jersey Securities Bureau learned of the dealer sales, it issued an order to the dealer to “cease and desist” from the solicitation of customers and offering the stock for sale in or from the State of New Jersey to any members of the public. The dealer then filed a declaratory judgment action against the Bureau in federal district court claiming 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 District Court, stated that 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.” Consequently, the constitutionality of state regulation 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; Otherwise, it is constitutional as long as the regulation furthers legitimate in-state interests.

The dealer argued that New Jersey should not be permitted to reach beyond its borders and block willing buyers from completing transactions authorized by their home states. According to the dealer, “the effects of the Bureau’s application of [New Jersey law] is [sic] 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.” The Bureau, on the other hand, claimed that New Jersey law simply regulates how brokers located in New Jersey conduct business from their New Jersey offices. According to it, the offer and sale arose in New Jersey. The broker chose to domicile its highly-regulated business in New Jersey and to conduct that business from within the state. While the Bureau conceded that New Jersey law may affect interstate commerce, it contended that this was merely an indirect effect of what is essentially New Jersey’s regulation of New Jersey parties seeking to sell securities from New Jersey.

The Court followed the modern approach, which is to recognize that contracts formed between citizens of different states implicate the regulatory interests in both states. Consequently, a contract between a dealer 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, and each state has an interest in regulating the aspect of the transaction that occurs within its boundaries. Accordingly, the Court held that New Jersey law simply allows New Jersey to regulate its “half” of the transaction—the offering that occurs entirely within the state of New Jersey and thus its territorial scope is legitimate. Consequently, it concluded that New Jersey law regulates the in-state components of an interstate transaction and upheld the New Jersey law. It found that New Jersey has a legitimate interest to prevent New Jersey companies from offering suspect securities to out-of-state buyers both because it helps preserve the reputation of New Jersey’s legitimate securities issuers and because it furthers New Jersey’s legitimate interest in supporting and protecting New Jersey buyers in the secondary market.