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Plaintiff Bulldog Investors managed
several hedge funds, which were unregistered pursuant to
SEC Regulation D, and maintained an interactive website
on which they provided information about their
investment products. The Secretary of the Commonwealth
ordered Bulldog to cease operation of the website and to
pay an administrative fine on the grounds that the site
constituted an offer to sell unregistered securities in
violation of Massachusetts securities laws. Plaintiff
moved to enjoin enforcement of the Secretary’s order,
claiming that enforcement would violate the First
Amendment and the Commerce Clause of the U.S.
Constitution.
The Court focused on likelihood of
success on the merits. Plaintiff did not identify “any
Court decision, at any level, striking down on First
Amendment grounds any statute, regulation, or
application of either with respect to the conduct of
issuers in offering or advertising securities.” Id.
at *5. The Court held that the challenged conduct
constituted commercial speech, and evaluated the claims
under the four part test set forth by the U.S. Supreme
Court.
First, the Court found that Plaintiff’s
speech was neither misleading nor related to unlawful
activity – although sale of unregistered securities to
unaccredited investors would violate federal law, the
Plaintiff’s website did not directly address investment
by unaccredited parties. Id. at *7. Second, the
Court found that the interest sought to be served by the
Secretary’s action – i.e., protection of the integrity
of capital markets – was substantial. Id. at *8.
Third, the Court found that the Secretary’s actions
would directly serve that interest by prohibiting
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public offerings of securities without
registration. Id. Fourth, the Court found that the
Secretary’s action was “reasonably proportional to the
interests to be served by the regulatory scheme.” Id.
at *10.
The Court acknowledged that this was the
most difficult prong of the test to apply, insofar as it
required the Secretary to prove that its actions were
narrowly tailored to the state’s interests. “The test is
not, however, one of least restrictive means. What is
required, rather, is that the regulation not burden
substantially more speech than is necessary to further
the government’s legitimate interests.” Id. at *9.
For the purpose of a preliminary injunction
analysis, the Court found that the Secretary had met its
burden under this prong and that Plaintiffs was not
likely to succeed on the merits of their First Amendment
claim.
Taking up Plaintiff’s Commerce Clause
claim, the Court again found that Plaintiff was not
likely to succeed on the merits. This claim asserted
that the Secretary’s regulation of the website burdened
interstate commerce in violation of the so-called
“dormant” Commerce Clause. But Plaintiff’s theory failed
“because neither the regulation itself nor the
Secretary’s application of it in the final order
attempts to regulate Bulldog’s website in and of itself.
Rather, the final order is based on the combination of
the website and the direct e-mail communication to a
Massachusetts resident.” Id. at *11. Importantly,
“[r]egulation of e-mail sent into a state has been held
not to implicate the dormant Commerce Clause, where
federal law authorizes state regulation in the area” –
and Congress had explicitly authorized state regulation
in the area of securities. Id.
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