Honorable Claude Isbell

Secretary of State Austin, Texas

Attention: Mr. Horace B. Sessions,

Securities Commissioner. !

Dear Sir: Opinion NO. O-6515 .i;'. Re: constxuction of Art. 6OOa, V. A. C. S., In respect to the authority of Secratarg of State to grant or deny application for permit to ,sell securltFes.

wehave received your recent request for an opinion, appearing as follows:

"This Divlslon has recently denied anapplication for the sale of securities In Texas by anunderwriting group out of Chicago and the applicant through a local aerl neg has questioned the authority of the Secretary of State under Section 8of the Texas Securities Act to pass upon the sale of securities to prospective investors in Texas as being fair, just and equitable. Since we find noTexas cases andnoAttorney Oeneral's Opinion

on the question weare herewith submitting the matter to your office.
.,
"ue briefly outline that the applicant is a nonresident manufacturing company desiring to sell

an Issue of debentures and commonstock in several sections of the United States by registration of the securities with the Federal Securities andExchange Commission and registration with those States In which

aportion of the securities will be offered and sold. The company itself will receive proceeds from the sale of the debentures less the usual underwriting discounts and commissions.

"In addition to the debentures the company as applicant Is seeking to qualify atotal of 350,000 shares of $1.00 per value commonstock for sale to the public at $10.00 per share, 300,000 shares of which

t\Hon. Claude Isbell, Eage2 (O-6515)

are ownedby one family and the proceeds from the sale of this 300,000 shares will go to the stockholders and nopart of such proceeds will be received by the

Fromthe total of 350OI)Oshares of common P4t”%?zi be sold the controlling stockholders will receive $2,5%,OOQ.O0 andthe company will receive $432,500.00 efter deduction of the underwriting discounts and commissions. earn1 Whils the company has afair

In 194 ..Y$record andhas pa.id i-ividends of .V per share
matelg the net asset val.ue of the stockla ai;proxi2.12 per share. The applicant was advised 1,n. writing that the Texas application was denied as the plan of the i.ssuer rlLdnot appear to be fair, just andequitable.

“The local counsel for the;underwritFng g:z;ouc, seeking to qualify the securities in the nameof >rie company contends that, until ‘the proposed plan of business freferred to in Section 8of the Texas Sec.;-- Fties Act, in this instance W-9manufacture of 2’adi.o parts and equipment, is found to be unfair, unjust and Inequitable, the Secretary of State can not refuse the application, unless of course, it mrvfu?‘ber find that the securities andmethods used in -issuln: and disposing of samewould work a fraud upon investor? under the pscvfsions of Section 8.

“The local counsel for the company was advised that it has been the policy of this Department to interpret the language ‘proposed plan of business’ under Section 8to meanthe proposed plan of the applicant, In this case the issuer, seeking to quai.ir"g securities. The Information called for under Sections 5, 6&7of the Texas Securities Act wou.ld not indicate that it was intended that the lznfunge ‘proposed plan of bus*ness’ be given ameaning restricted to the corporate business for which the company wasorganized. In the Instant case the plan andmethod of the company
as applicant in qualifying commonstock of conf:7clll.ng stockholders 1FquidatFng their intszests in the company Is of major concern to the Texas investing publ.rc, and such plan andmethod has noprimary relation 

### to whether the company’s manufacture of radio equipment and parts is fair, just andequitable. Such arestricted mea.ningwould of course give no autkolrtg to this Department to pass upon whether or not the price at whFchacontrolling stockholder is bailing out by disposing of his personal holdings in acompany might be fair, just and equitable.Bon. Claude Isbell, page 3 (O-6515)

“I amsure you appreciate that this raises aquestion as to whether the Texas Securities Act Is intended to be merely a full disclosure statute requiring the Department to pass favorably upon all applications for registration of securities unless there Is such mlsrepresentation and failure to dlsclose material facts

as might be considered fraudulent under the definltlon of the term found In Section 2 (f), or, .the Department Is charged with the responsibllitg of passing upon whether or not it maybe fair, just and equitable for any particular Issue of securities to be offered and sold in Texas after giving consideration to the price, financial condltlon, earnings, dividend payments, and other factors relating to the company and disposition of the securities as distinguished from merely passing upon whether the corporate business engaged in by the issuer Is fair, just andequitable. In this connection It will be noted that there Fsanabsence of any provision in the Texas Securities Act for the publication or use of aprospectus maklng full disclosure in connection with an offering of securities as is usually required under afull disclosure statute.

“Weshall appreciate your favorlng us with an opinion on the question of whether or not the Secretary of State maydeny anapplication for ragistration of securities under the Texas Securltles Act on the grounds that the lan of the applicant ~(issue?, underwriter, or dealer Pseeking to qualify the secudtles appears unfair, unjust, and InequItable upon consideration of all factors concerning which the ?~pplicant is required to furnish Information under the provisions of the Act.”

As weunderstand your question, you are not calling upon the Attorney General for adecislpn in the particular fact situation presented in your letter, but you are merely requesting an interpretation of Section 8of Article 6OOa, Vernon’s Annotated Civil Statutes, in respect to the authority of the Secretary of State to grant or deny an application for apermit for the sale of securities, and.,,said fact sltuatlon is presented solely for the purpose oPstating the question in concrete form.

With the understanding that weare not passing upon the fact situation submitted in your communication, weshall proceed to answer your question.

Subsection (f) or Sec. 2, of Art. 6OOa,V. A. C. S.,provides as follows:

“The terms ‘fraud, t ffraud:ulent -t,actIce’ shall Include any misreI;resentations, Fnanymanner, of arelevant fact; any promise or representation or prediction as to the future not madehonestly and in good faith, or an Intentional failure to i13cloee amaterial fact; the gainlrg, dlrectlg or Indirectly, through the sale of any securLty, onanunderwriting or promotion fee or profit, selllng or man.ag:i-sgcommission or profit,

so groscr or exorbitant as to be uncoc~cionzble; any scheme, device crother artifice to obtain such profit, fee or commission; providea, that nothing herein shall limit, or dlmlnloh the full meaning of the terms ‘fraud, t ‘fr:-r&lent, IandFraudulent practice’ as applied or accepted In courts of law or equity.”

Sections 5,6,and 8of Art. 6ooa, V. A. C. S., provide as follows:

“Sec. 5. Nodealer, age&t or sa,lesman shall sell or offer for sale any securities issued after the passage of this Act, except those whlrh COWwithin the classes enumerated in Subdivisions (a) to (c) :-Q-h inclusive, of Section 3of th-113 P.ct, or Suhdivislons (aj 42ii)> both inclsafve of Section 23 of this Act, untX1 the Ise:lez of such securities 3hell hvtrebeen granted apermit by t?..,+Secretary of St:?P:a,.andno such permit shali be granted by the Secretary of Sta5e until the Issuer of such securities shall have fi.led tit% the Secretary of State a
sworn statement veriffed under the oat? of anexecutive officer of the issuer andattested by the c1cretary thereof, 3ettlng forth the 

### follodng Fnfo?matLonn $

“(a) The name3, res,fdence3 ati post office addrease3 of the officers and directors of the company.

bran hoff;:%3 e ‘iocation 

### orft5princ:ipal. 

### GfrfC+and of all 1 c T:I

### Y.isState 9if any.

I’(C) Acopy of Its ar+,l.cles 

### Or1,nc.r,:~p~or”ationor partnership or assotlat.i.on, as the case maybe, and of any amendments thereto, if any. If acorpoz%tior;, acor;y of ’ all minutes of a;y proceeding of its di?ecto?s, “tockholders c? membe::3 relating to or affecttng the issue o$.’said security. If a corporation, acony of Itsby-laws and of any amendments ther.- of. I,Patrustee, acopy of all Fnstruments by which the trust Is created and in which it is accepted, acknowledged or declared.

.,.- ~.2~~‘.Z

“(d) Astatement shc~&?g the amount cf capital stock, if any, and if nocapital stocky. the amount of capital of the issuer that is contemplated to ‘ueemployed: the number of share3 into which such stock 1s divided, or if not divided Znto shares of stock, what di.vi.‘sion is to be madeor is ccntemplated; the par value of each share, or if nopar stock, the price at which such security is prcposed to be 3@ld; the commission to be paid for the sale of same, including ang andall compensation of every neture that Is in any wayto be allowed for the sale of same; andhowsuch compensation is to be paid - whether in cash, stock, service, 0~ other-use, or afilly of either or both; also, the amount of cash to be pa d, B or stock to be

!1

.

Hon. Clsude Isbell, page 5 (O-6515)

Issued for pmmotlon and/or organization ser-vices and expenses, and the amount of promotion and/or organization services and expenses’ irhich- will’ be assumed OFin any waypaid by the issuer.

“(a) Coplee of oertiflcates of the stock and all other securities to be sold, or offered for sale, together with application blanks therefor; acopy of any contract it proposes to makeconcerning such security; acopy of any prospectus or advertisement

or other desoription of security prepared by o? for it for distribution or publication.

“(P) Adetailed statement showing all the assets and all the llabllitles of the Issuer, said statement to reflect the financial condition of the Issuer on
a day not more than ten (10) days prior to the date such statement la filed. Such statement shall list all assets lti~detail and shall showhowthe value of such assets was detetilned - that Ps, whether.the value ;;;pet forth in sald~statement represents the a.ctJ-al cost 

### .-in money of such~assets, or whether such value represents

,their pri?sent market value, or sbme&h&r values than

‘I’ the actual cost In money, and shall shof~the present actual. value of’ $aid assets; also, whether the value set forth In the statement is greater or less than the actual cost value In money and ‘greater or less than the present market value of such assets. If any of the assets consist of real estate, then sald statement shall show the amount for which said real estate Is rendered for state andcounty taxes, or assessed for taxes. If any such assets listed shall consist of anything other than cash Rndreal estate, same shall be set out in detail so as to give the Secretary of State the fullest possible lnformatlon concerning same, and the 

### Secretary of State shall have the power to require the filing of such addltlbnal lnfomation as he may deemnecessary to determine whether or not the true value of saLd assets are reflected in the statement filed. Should any of the assets listed 

### In said statement be subject to any repurchase agreement,


### orany other agreement of like character, by the terms of which the absolute OmelVhiD of, or title to said assets is qualified or limited in any way, then the terms and conditions of said agreement by which the absolute ownership of, or title to said assets 1s qualified or limited, as well as the amount and character of the assets subject thereto shall be fully stated. Said statement Phall list 

### all current liabilities - that ia, all liabilities which will mature and hecorn- AWwlthln six (6)Ron. Claude Isbell, page 6 (O-6515)

months from 

### the date of 

### such application, and shall list separately from such current liabilities, all other llabllltles, contingent or otherwise, 

### showing the amount of those which are secured by mortage

or otherwise, the assets of the issuer which are subject to 

### such mortage, and the dates of maturity of any 

### such mortage indebtedness. Such applLcation shall also Include adeteLled 

### profit andloss statement, which shall cover the last three (3) years operations of the Issuer, if 

### such Fssuer has been in operation for three (3) years -but, if not, said profit and loss statement shall cover the time that sa1.i Lssuer has been opemting. If said issuer has not been operat'Lng, but is tak'.ng o'iar aconcern of any kind which has been previously ,:,~~orating, then a financial and

### profit and laze statement showing the operations of the concern thus taken over for apertod of the last three (3) years next preceding the taking over of said

concern shall be included In said statement; said profit and loss statement shall clearly reflect **the** amount >fnet,profit or net loss incurred dur%ng each of the years shown.

"Sec. 6. If the application ba filed for

or onbehalf of anIssuer organized under the laws of any other state, territory, or government, or domiciled 

### in anyether etate than Texas, such application shall also contain acertificate executed by the proper officer of such state, territory or government dated not more than thirty (30) days prior to the date of filing of the applicatior showing that such Issuer is authorized to transact business In such state, territory or government, and is not delinquent in any taxes or assebsments required to be paid to such state, territory or government. Such applicant shall also by written instrument duly executed by an executive officer thereof, under proper resolution of its board of 

### directors, and authenticated andattested by the seal of sold issuer, appoint the 

### Secntarg of State of Texas Irrevocably its true and lawful attorney upon whomall process in any actlon or proceeding agaFnst it maybe served with the sameeffect as if such issuer were organized or created under the laws of this state andhadbeen lawfully served with process therein. It shall be the duty of the Secretary of State, whenever he shall have been served with any process as Is herein provided,Hon. Claude Isbell, page 7 (O-6515)

to forward samebyUnited States mall to the home office of such issuer.

“sec. 8. Upon the filing of anapplication,
,< l$ shall be the duty of the Secretary of State to

examine the sameand the papers and documents flled therewith. If he finds that- the proposed-~plan of business of the applicant appears to be fair, just and equitable, and~~that the securities which it proposes to-issue and the method9 to be used by it in Issuing and dlbposlng of the sameare not such

as will work a fraud upon the purchaser thbreof; the Secretary of State shall issue to the applicant

apermit authorizing it to issue and disnose of such securities. Should the Secretary of State find that the proposed plan of business of the applicant appears to be unfair, unjust or InequItable, he shall deny the application for apermit and notify the applicant in writing of his decision. Any issuer,

as the sameis defined herein, whois dissatisfied with any ruling or decision of the Secretary of State, mayfile within ten (10) days the=after, an application for ahearing before the Secreta= of State, whoshall, within ten (10) days after the receipt of such application, set said hearing at such time andplace as he mayfix, and shall.give said applicant ten (10) days notice of such hearing. Such applicant mayappeal from any sling OT declslon madeat such hearing ln the samemanner and In the sameform as is hereinafter provided for appeals by or onbehalf of dealers, and the rules applicable thereto and the relief to be had shall be the same.

Further condensing your question, webelieve that your inquiry will be fully answered by our lnteroretatlon of the meaning of the following sentence contained LnSet- 8, Art. 600a, suprar

“If he finds that the proposed plan of business of the applicant appears to be fair, just andequitable, and that t’he securities Which it proposes to issue and the methods to be used by It in issuing and disposing of the

sameare not such as will work afraud upon the purchaser thereof, the Secretary of State shall Issue to the applicant apermit authorizing It to issue and dispose of such securities.”Hon. Claude Isbell, 

### Page 8 (o-6515)

Wefirst must determine what constitutes the “proposed plan of business” of anappilcant such as the one mentioned byyou. 

### In the case of HomeLumberCo. et al

vs. Hopkins, Attorney General, et al, 

### 190 Pac. 601,wherein

an application for writ of- mardamus 

### was granted by the Supreme court 

### ofKansas, compelling the state charter board to consider andpass upon the merits of anapplication of a trust company’seeklng to sell shares of its stock in the, State of Kansas, the following was said:

“The board assumed that plairtlff was seeking to dobusiness in Kansas under anorganization not recognized in the State. Thepermission sought, however, was not admission Into the state for the purpose of doing business, andwas
nomore %an an oppcrtunlty to sell shares of stock with aview of raising money onwhich to dobusiness. The general holding of the courts is that the doing of business is the txarcise of some of the functions and the carrying on OFthe ordinary business for which the company is organized.”

While not detei-minative of our question, webelieve the above expression of the Kansas Supreme Court warrants cur eliminating the selling of stock ,anddebentures by the company in question from the category of “plan of business”

. In the illustrative fact situatfon onhand, wefind that the applicant is anonresident “manufacturing” company engaged in manufacturing radio parts and equipment O It mustbe assumed that In order to begin its 

### q anufac+uring it bad to organize Itself under the laws of its domicile, also that in order to raise money “on which to dobusiness” It issued debentures and commonstock. Wesee noreason wbgall this would got be properly ciasslfled as component parts of the “business”

or “plan of business” of the applicant. If the manufacturing, organization, financing, liabilfties and assets, etc., in other words - the corporate structure - of applicant are deemed fair, just andequitable by the Secretary of State,

as appearing in the statement fl.led by applicant, then he is authorized to Issue apermit for such securities (debentures and stock) to be sold in Texas

, provided that such securities,

as they are proposed to be sold In this State compared with their true worth as Indicated by the stated condition of the company, are not such as will work afraud upon the purchaser thereof. Wethink the Intent of the provision of the statute in question wasto apply the test of fairness, justness and equitableness to everything dotie by tineapplicant company, for which areport or statements mustbe filed, other than that done in respect to the selling of its securities. The sale value of same, together with the method andmanner ofHon. Claude Isbell, page 9 (O-6515)

selling same, was intended to be tested by the standard of fraud. This distinction can be seen whenFt is recalled that stock or debentures could be issued in respect to their actual value fair, just and equitable, while samecould be put upfor sale at a value such as to work a fraud on the purchaser. We donot belleve that said Art. 600a, supra, gives any authority for the Seoretary of State to engage **In** “price fixing” of securities, unless afraud is thereby perpetrated on the Investor

as provided In Subsec’tlon *(f) of Sec. 2, Art. 6Ooa, supra. However, webelieve the Legislature by Its definition of “fraud” and “fraudulent practice” In said Subsection (f) of Art. 600a, eupra, 1. e., “the gaining, directly or lndlrectly

, through the sale of any security, or any underwriting or promotion fee or profit, selling or managing commission or profit, so gross or exorbitant as to be unconscionable; any scheme, device

or other artifice to obtain such proflt, fee or commission;” authorized the refusal to issue apermit on the grounds of fraud In cases where the proposed selling price of the securities is so out of line with their actual value as to makethe selling profit on same unconscionable.” “so gross or exorbitant as to be This would beaques’tlon of fact to be determined in any given case by the findings of the Secretary of State. Wetrust the foregoing fully answers your inquiry.

Yours very truly,

ATTORNEY

GFXERALOFTEXAS

BY/s/ Robert L. Lattlmon$Jr. Robert L. Lattlmore, Jr.

Assistant RLL:LJ -dhs

APPROVEDAPR. 30, 1945 /s/ Carlos C. Ashley FIRSTASSISTAN’IATTORNEY(IENERAL APPROVBD OPINION COMMITTEE BYL.P.L. C-