In addition to the federal securities requirements, a company wishing to offer securities in Texas must also comply with the Texas securities requirements. To avoid having to register the securities under the Texas Securities Act, a company must satisfy one of the available exemptions from registration. As well as the exemption for employee stock option and similar plans, Texas has a uniform limited offering exemption, the Texas intrastate limited offering exemption, and two other general limited offering exemptions.

     The two general Texas limited offering exemptions are the subject of this article. The first exempts the sale of any security by the company as long as the total number of security holders of the company does not exceed 35 persons after the sale. The second exemption allows sales by a company to not more than 15 persons within a 12-month period. Both exemptions are conditioned on there being no “public solicitation” or “advertisement” and that the securities be purchased for the investors' own account and not for distribution. Accredited investors are not counted in determining the total number of security holders or purchasers.

     No sale of securities will be exempt under the Texas limited offering exemptions unless the company makes the sale without any public solicitation or advertisements. Under Texas law, the offer or sale does not involve the use of “public solicitation” if the company, after having made a reasonable factual inquiry has reasonable cause to believe that the purchasers of the securities are either: (1) “sophisticated” and “well-informed”; or (2) “well-informed” and have a relationship with the company or its principals, executive officers, or directors evincing trust. Such trust relationship refers namely to a close business association, a close friendship, or close family ties.

     The company can satisfy the “well-informed” requirement by providing printed material to the investor before the purchase, that is fair and factual and discloses the company’s plan of business, its history, its financial statements. The disclosures must contain all material facts necessary to avoid making any misleading statements.

     In determining whether an investor is “sophisticated,” the company must consider at least the following:

1.     Is the financial capacity of the investor such that the total cost of that investor's commitment in the proposed investment is not be material when compared with the investor's total financial capacity? (The company may be presumed that if the investment does not exceed 20 percent of the investor's net worth, or joint net worth with the investor's spouse, at the time of the sale, the amount invested is not material.)

2.     What is the level of the investor's general knowledge of finance, securities, and investments?

3.     What is the investor's experience and skill in investments based on actual participation?

     The investor can meet the second and third criteria above by having a purchaser representative, so long as the purchaser representative: (1) has such knowledge or experience and skill; (2) has no business relationship with the company; (3) represents only the investor and not the company; and (4) is compensated only by the investor.

     The term “advertisement” does not include the printed material used to satisfy the “well-informed” requirement. Instead, the term “advertisement” focuses on how the printed material is used. In determining whether the “method of use” of any printed material is within the limits of the Texas Securities Act, the following circumstances, though not intended to be exclusive, may be considered:

1.     The limited printing of the material.

2.     The distribution of the material is limited to only: (a) persons who the company, after having made a reasonable factual inquiry has reasonable cause to believe, and does believe, are sophisticated investors; (b) persons who have a relationship with the company as set forth above; and (c) the investors' purchaser representatives.

3.     The printing and distribution of the printed material is controlled.

4.     Recognition of the necessity of compliance with the statutory requirement of limited use of printed material on the part of the company and the investor. Such recognition may consist of a printed provision on the front in large type that the circular is for that individual's confidential use only and may not be reproduced. Such recognition may also consist of the use of a statement warning that any action contrary to these restrictions may place the individual and the company in violation of the Texas Securities Act

     In general, the Texas limited offering exemptions limit the resale of securities sold under those exemptions. The company and any person acting on its behalf must exercise reasonable care to assure that the purchasers are acquiring the securities as an investment for their own account and not for distribution. This reasonable care should include, but is not limited to, the following:

1.     Making a reasonable inquiry to determine whether the purchaser is acquiring securities for its own account or on behalf of other persons.

2.     Placing a legend on the securities stating they have not been registered under any securities law and setting forth or referring to restrictions on the transferability and sale of the securities.

3.     Issuing stop transfer instructions to the company’s transfer agent, or, if the company transfers its own securities, making a notation in the appropriate records of company.

4.     Obtaining from the purchaser a signed written agreement that the purchaser will not sell the securities without registration under the applicable securities laws or exemptions from registration.

5.     Before the sale, give a written disclosure to each purchaser stating that (a) the purchaser must bear the economic risk of the investment for an indefinite period because the securities have not been registered under any securities laws and cannot be sold unless they are registered or an exemption from registration is available, and (b) the securities are subject to the limitations set forth in items (2) through (4) above.

Please see the following articles for additional information: Private Offering Exemption / Regulation D Exemption, Federal Intrastate Securities Exemption, Federal Securities Aspects of a Stock Option Grant, Texas Exemption for Employee Stock Option and Similar Plans, Texas Uniform Limited Offering Exemption, Texas Intrastate Exemption.

THIS INFORMATIONAL MEMORANDA FROM THE LAW OFFICES OF THOMAS D. SOLOMON, P.C. is provided as a courtesy to our friends and clients to provide them with items of interest in the securities area. It is not and is not intended to be an exhaustive treatment of its subject matter,, but rather an overview of some of the pertinent elements of such matter. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have any questions, please call us.