In addition to complying with the federal securities requirements, a person who wishes to offer securities under an employee stock option plan in Texas must also comply with the Texas securities requirements. Texas exempts from the State’s registration requirements the sale or distribution of securities by an employer under a stock option, stock bonus, incentive stock, or similar plan for the company’s employees or directors, so long as certain requirements are met. These requirements include prohibiting the use of any “public solicitation” or “advertising”.
Public Solicitation. 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 of the following: (1) “sophisticated” and “well-informed investors”; or (2) “well-informed” investors who have a relationship with the company or its principals, executive officers, or directors evincing trust between the parties. Such trust relationship refers namely to a close business association, a close friendship, or close family ties.
Well-Informed. The company can satisfy the “well-informed” requirement by giving each prospective purchaser, before his or her purchase, printed material that is fair and factual and discloses the plan of business, the history, and the financial statements of the company. The material must contain all material facts necessary to avoid making any statement misleading in light of the circumstances under which they are made.
Sophisticated. In determining whether an investor is “sophisticated,” the company must consider at least the following factors:
1. The financial capacity of the investor is of such proportion that the total cost of that investor's commitment in the proposed investment would not be material if compared with the investor's total financial capacity. (It 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. The investor's general knowledge of finance, securities, and investments.
3. The investor's experience and skill in investments based on actual participation.
The criteria in items (2) and (3), above, may be met by the investor's purchaser representative, as long as the purchaser representative has such knowledge or experience and skill, has no business relationship with the company, represents only the investor and not the company, and is compensated only by the investor.
Advertising. The term “advertisement” does not include the use of the type of printed material as set forth above under the discussion of the term “well-informed”. Instead, the definition of “advertisement” for purposes of the Texas Securities Act focuses on the method of use of printed material. In determining whether the “method of use” of any printed material is within the limits of the Securities Act, the following circumstances, though not intended to be exclusive, may be considered:
1. The limited printing of the material.
2. The limited distribution of the material only to the following persons: (1) persons who the company, after having made a reasonable factual inquiry has reasonable cause to believe, and does believe, are sophisticated investors; (2) persons who have a relationship with the company as set forth above; and (3) investors' purchaser representatives.
3. The control of the printing and distribution of the printed material.
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 addition to the exemption for employee plans, Texas has two general limited offering exemptions, a uniform offering exemption, and an intrastate offering exemption, as discussed in their respective accompanying articles.
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 Uniform Limited Offering Exemption, Texas Intrastate Exemption, Texas Limited Offering Exemptions.
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.
