Misapplication of the Federal Extraterritoriality Principle in Limiting the Scope of Civil Remedies for Fraud Under State Blue Sky Laws

Abstract

States do not exercise extraterritorial power when a civil remedy for purchasers of securities victimized by unlawful conduct in the offer and sale of those securities is invoked by out of state purchasers under the Blue Sky Law of the state in and from which the distribution of securities was undertaken. The Extraterritoriality Principle under the Dormant Commerce Clause of the U.S. Constitution does not bar the invocation of a post-transaction by out of state purchasers. A United States District Court misapplied the Extraterritoriality Principle by constructing a bright-line "transaction" test to cabin the territorial limit of a purchaser remedy. The court ignored the object of regulation and protection under Blue Sky Laws as applied to the entire process of a distribution of securities, and mistakenly equated the application of a post-transaction civil remedy with the projection of state regulation outside the state.

Keywords: Blue Sky law, state securities regulation, Dormant Commerce Clause, Extraterritoriality Principle

JEL Classification: K20