In addition to complying with the federal securities requirements, a person who wishes to offer securities in Texas without complying with the Texas registration requirements must satisfy one of the Texas exemptions from registration. In addition to an exemption for employee stock offerings, Texas has two limited offering exemptions as well as the Texas uniform limited offering exemption, and the Texas intrastate limited offering exemption which is the subject of this article.
The Texas Securities Board exempts from registration certain transactions under the Texas intrastate limited offering exemption. This exemption may not be combined with any other offering exemption. A transaction may be exempt under the Texas intrastate limited offering exemption if any offer or sale of any securities by the company itself, or by a registered dealer acting as agent for the company are made pursuant to an offering made and completed solely within Texas and all the following conditions are satisfied.
First, the sale must be made without the use of any “public solicitation” or “advertisement”.
An 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 are either: “sophisticated” and “well-informed”; or “well-informed” and have a relationship with the company or its principals, executive officers, or directors evincing trust. This trust relationship refers to a close business association, a close friendship, or close family ties. The requirement of “well-informed” may be satisfied by giving the investor printed material before his or her purchase. Purchasers become “well-informed” the owner gives them material that is fair and factual and discloses the plan of business, the history, and the financial statements of the company. The disclosures must contain all material facts necessary to avoid making any statement misleading in light of the circumstances under which they are made.
In determining whether an investor is “sophisticated,” the company should consider at least the following factors:
1. The financial capacity of the investor must be 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. (The company can presume 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.
An investor can meet the criteria in items (2) and (3) by having a purchaser representative who (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 described in the discussion “well-informed”. Instead, the definition of “advertisement” focuses on how the printed material is used. In determining whether the use complies with the Texas Securities Act, the following circumstances, though not intended to be exclusive, may be considered:
1. Limited printing of the material.
2. Limited distribution of the material to only persons who the company, after having made a reasonable factual inquiry has reasonable cause to believe, and does believe, are sophisticated investors; and who have a relationship with the company as set forth above; and 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.
The sale must also meet the limitations on disposition, that is, the company and any person acting on its behalf must exercise reasonable care to assure that each purchaser is acquiring the securities as an investment.
Second, to qualify for the Texas intrastate limited offering exemption, the offer or sale must be made to:
1. Not more than 35 new security holders of the company who are unaccredited investors and who are either sophisticated, well-informed investors or well-informed investors who have relationship with the company or its principals, executive officers, or directors evincing trust between the parties and who became security holders during the period of 12 months ending with the date of the sale in question; or
2. Other “well-informed investors” who are “accredited investors”.
For purposes of the intrastate exemption, an “accredited investor” includes
1. Any director, executive officer, or general partner of the company of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of the issuer of securities being offered or sold.
2. Any person who purchases at least $150,000 of the securities being offered, if the purchaser's total purchase price does not exceed 20 percent of purchaser's net worth at time of sale, or joint net worth with that person's spouse, for cash.
3. Any natural person whose individual net worth, or joint net worth with that person's spouse, at time of the sale exceeds $1 million.
4. Any natural person (1) who has had an individual income with that person's spouse in excess of $200,000 in each of the two most recent years and (2) who reasonably expects income in excess of $200,000 in the current year.
Persons who are “accredited investors” as defined above, are deemed to be “sophisticated” investors for purposes of the public solicitation prohibition. For sales to accredited investors listed in items (2) through (4), above, sworn notice of the sales with the securities commissioner must be filed at least 10 days before any sale claimed to be exempt may be consummated.
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 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 corporate acquisition 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.
