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. 

we have received your recent request for an opinion, 

appearing as follows: 

"This Divlslon has recently denied an application 

for the sale of securities In Texas by an underwriting 

group out of Chicago and the applicant through a local aerl 

neg has questioned the authority of the Secretary of 

State under Section 8 of 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 no Texas cases and no Attorney Oeneral's Opinion 

on the question we are 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 common stock in several 

sections of the United States by registration of the 

securities with the Federal Securities and Exchange 

Commission and registration with those States In which 

a portion 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 a total of 350,000 

shares of $1.00 per value common stock for sale to 

the public at $10.00 per share, 300,000 shares of which 

t\ 
Hon. Claude Isbell, Eage 2 (O-6515) 

are owned by one family and the proceeds from the 

sale of this 300,000 shares will go to the stockholders 

and no part of such proceeds will be received by the 

From the total of 350 OI)O shares of common 

P4t”%?zi be sold the controlling stockholders will 

receive $2,5%,OOQ.O0 and the company will receive 

$432,500.00 efter deduction of the underwriting discounts and commissions. 

earn1 

Whils the company has a fair 

In 194 ..Y$ 

record and has 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 rlLd not appear to be fair, just 

and equitable. 

“The local counsel for the;underwritFng g:z;ouc, 

seeking to qualify the securities in the name of >rie 

company contends that, until ‘the proposed plan of 

business f referred to in Section 8 of the Texas Sec.;-- 

Fties Act, in this instance W-9 manufacture 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 mrv fu?‘ber find that 

the securities and methods used in -issuln: and disposing 

of same would 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 8 to mean the proposed plan of the 

applicant, In this case the issuer, seeking to quai.ir"g 

securities. The Information called for under Sections 

5, 6 & 7 of the Texas Securities Act wou.ld not indicate 

that it was intended that the lznfunge ‘proposed plan 

of bus*ness’ be given a meaning restricted to the 

corporate business for which the company was organized. 

In the Instant case the plan and method of the company 

as applicant in qualifying common stock of conf:7clll.ng 

stockholders 1FquidatFng their intszests in the company 

Is of major concern to the Texas investing publ.rc, 

and such plan and method has no primary relation to 

whether the company’s manufacture of radio equipment and 

parts is fair, just and equitable. Such a restricted 

mea.ning would of course give no autkolrtg to this 

Department to pass upon whether or not the price at 

whFch a controlling stockholder is bailing out by 

disposing of his personal holdings in a company might 

be fair, just and equitable. 
Bon. Claude Isbell, page 3 (O-6515) 

“I am sure you appreciate that this raises a question 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 may be 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 and equitable. In this 

connection It will be noted that there Fs an absence 

of any provision in the Texas Securities Act for the 

publication or use of a prospectus maklng full disclosure 

in connection with an offering of securities as is 

usually required under a full disclosure statute. 

“We shall appreciate your favorlng us with an 

opinion on the question of whether or not the Secretary of State may deny an application for ragistration 

of securities under the Texas Securltles Act on the 

grounds that the lan of the applicant ~(issue?, underwriter, or dealer P seeking 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 we understand your question, you are not calling 

upon the Attorney General for a decislpn in the particular 

fact situation presented in your letter, but you are merely 

requesting an interpretation of Section 8 of Article 6OOa, 

Vernon’s Annotated Civil Statutes, in respect to the authority of the Secretary of State to grant or deny an application 

for a permit 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 we are not passing upon the 

fact situation submitted in your communication, we shall 

proceed to answer your question. 

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

“The terms ‘fraud, t f fraud:ulent -t,actIce’ shall Include 

any misreI;resentations, Fn any manner, of a relevant fact; any 

promise or representation or prediction as to the future not 

made honestly and in good faith, or an Intentional failure to 

i13cloee a material fact; the gainlrg, dlrectlg or Indirectly, 

through the sale of any securLty, on an underwriting or promotion fee or profit, selllng or man.ag:i-sg commission or profit, 

so groscr or exorbitant as to be uncoc~cionzble; any scheme, 

device cr other 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, I and Fraudulent 

practice’ as applied or accepted In courts of law or equity.” 

Sections 5, 6, and 8 of Art. 6ooa, V. A. C. S., 

provide as follows: 

“Sec. 5. No dealer, age&t or sa,lesman shall sell or 

offer for sale any securities issued after the passage of this 

Act, except those whlrh COW within the classes enumerated in 

Subdivisions (a) to (c) :-Q-h inclusive, of Section 3 of th-113 

P.ct, or Suhdivislons (aj 42 ii)> both inclsafve of Section 23 

of this Act, untX1 the Ise:lez of such securities 3hell hvtre been 

granted a permit by t?..,+ Secretary of St:?P:a,. and no 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 an executive officer 

of the issuer and attested 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 h off;:%3 

e ‘iocation or ft5 princ:ipal. GfrfC+ and of all 

1 c T: I Y.is State 9 if any. 

I’(C) A copy of Its ar+,l.cles Or 1,nc.r,:~p~or”ation or partnership or assotlat.i.on, as the case may be, and of any amendments thereto, if any. If a corpoz%tior;, a cor;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, a cony of It s by-laws and of any amendments ther.- 

of. I,P a trustee, a copy of all Fnstruments by which the trust 

Is created and in which it is accepted, acknowledged or declared. 

.,.- ~. 2~~ ‘.Z 

“(d) A statement shc~&?g the amount cf capital stock, 

if any, and if no capital stocky. the amount of capital of the 

issuer that is contemplated to ‘ue employed: 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 made or is ccntemplated; the 

par value of each share, or if no par 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 and all compensation 

of every neture that Is in any way to be allowed for the sale 

of same; and how such 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 B d, 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 OF in 

any way paid 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; a copy 

of any contract it proposes to make concerning such 

security; a copy of any prospectus or advertisement 

or other desoription of security prepared by o? for 

it for distribution or publication. 

“(P) A detailed 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 show how the 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 and county taxes, or assessed for taxes. If any 

such assets listed shall consist of anything other 

than cash Rnd real 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 

deem necessary 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, 

or any 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- AW wlthln 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 a deteLled profit and loss 

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 a concern 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 a pertod 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 >f net,profit or net loss incurred 

dur%ng each of the years shown. 

"Sec. 6. If the application ba filed for 

or on behalf of an Issuer organized under the laws 

of any other state, territory, or government, or 

domiciled in any ether etate than Texas, such 

application shall also contain a certificate 

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 and attested by the 

seal of sold issuer, appoint the Secntarg of State 

of Texas Irrevocably its true and lawful attorney 

upon whom all process in any actlon or proceeding 

agaFnst it may be served with the same effect as if 

such issuer were organized or created under the 

laws of this state and had been 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 same by United States mall to the home 

office of such issuer. 

“sec. 8. Upon the filing of an application, 

,< l$ shall be the duty of the Secretary of State to 

examine the same and 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 same are not such 

as will work a fraud upon the purchaser thbreof; 

the Secretary of State shall issue to the applicant 

a permit 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 a permit and notify the 

applicant in writing of his decision. Any issuer, 

as the same is defined herein, who is dissatisfied 

with any ruling or decision of the Secretary of 

State, may file within ten (10) days the=after, an 

application for a hearing before the Secreta= of 

State, who shall, within ten (10) days after the 

receipt of such application, set said hearing at 

such time and place as he may fix, and shall.give 

said applicant ten (10) days notice of such hearing. Such applicant may appeal from any sling OT 

declslon made at such hearing ln the same manner 

and In the same form as is hereinafter provided for 

appeals by or on behalf of dealers, and the rules 

applicable thereto and the relief to be had shall 

be the same. 

Further condensing your question, we believe that 

your inquiry will be fully answered by our lnteroretatlon of 

the meaning of the following sentence contained Ln Set- 8, 

Art. 600a, suprar 

“If he finds that the proposed plan of 

business of the applicant appears to be fair, 

just and equitable, and that t’he securities 

Which it proposes to issue and the methods to 

be used by It in issuing and disposing of the 

same are not such as will work a fraud upon 

the purchaser thereof, the Secretary of State 

shall Issue to the applicant a permit authorizing It to issue and dispose of such securities.” 
Hon. Claude Isbell, Page 8 (o-6515) 

We first must determine what constitutes the “proposed plan of business” of an appilcant such as the one 

mentioned by you. In the case of Home Lumber Co. et al 

vs. Hopkins, Attorney General, et al, 190 Pac. 601, wherein 

an application for writ of- mardamus was granted by the 

Supreme court of Kansas, compelling the state charter board to 

consider and pass upon the merits of an application 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 do business in Kansas under an organization not recognized in the State. The permission sought, however, was not admission Into the 

state for the purpose of doing business, and was 

no more %an an oppcrtunlty to sell shares of stock 

with a view of raising money on which to do business. 

The general holding of the courts is that the doing 

of business is the txarcise of some of the functions 

and the carrying on OF the ordinary business for 

which the company is organized.” 

While not detei-minative of our question, we believe 

the above expression of the Kansas Supreme Court warrants cur 

eliminating the selling of stock ,and debentures by the company 

in question from the category of “plan of business”. In 

the illustrative fact situatfon on hand, we find that the 

applicant is a nonresident “manufacturing” company engaged in 

manufacturing radio parts and equipment O It must be 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 do business” It issued debentures 

and common stock. We see no reason wbg all 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 and equitable by the Secretary of State, 

as appearing in the statement fl.led by applicant, then he is 

authorized to Issue a permit 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 a fraud upon the purchaser 

thereof. We think the Intent of the provision of the statute 

in question was to apply the test of fairness, justness and 

equitableness to everything dotie by tine applicant company, 

for which a report or statements must be filed, other than 

that done in respect to the selling of its securities. The 

sale value of same, together with the method and manner of 
Hon. Claude Isbell, page 9 (O-6515) 

selling same, was intended to be tested by the standard of 

fraud. This distinction can be seen when Ft is recalled that 

stock or debentures could be issued in respect to their actual 

value fair, just and equitable, while same could be put up for 

sale at a value such as to work a fraud on the purchaser. We 

do not belleve that said Art. 600a, supra, gives any authority 

for the Seoretary of State to engage In “price fixing” of securities, unless a fraud is thereby perpetrated on the Investor 

as provided In Subsec’tlon *(f) of Sec. 2, Art. 6Ooa, supra. 

However, we believe 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 a permit 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 make the 

selling profit on same 

unconscionable.” 

“so gross or exorbitant as to be 

This would be a ques’tlon of fact to be 

determined in any given case by the findings of the Secretary 

of State. 

We trust the foregoing fully answers your inquiry. 

Yours very truly, 

ATTORNEY GFXERAL OF TEXAS 

BY /s/ Robert L. Lattlmon$Jr. 

Robert L. Lattlmore, Jr. 

Assistant 

RLL:LJ -dhs 

APPROVED APR. 30, 1945 

/s/ Carlos C. Ashley 

FIRST ASSISTAN’I ATTORNEY (IENERAL 

A PPROVBD 

OPINION 

COMMITTEE 

BY L.P.L. 

C-