Honorable Tom Blackwell Opinion No. C-423 

District Attorney 

Travis County Courthouse Re: Whether under the stated 

Austin, Texas facts, certain persons 

and a certain corporation 

have violated The Securities Act by a sale of the 

Dear Mr. Blackwell: securltles in question. 

You have requested an Attorney Qeneral’s Opinion 

on whether, under submitted facts, certain sales of 

securities have been made In violation of The Securities 

Act, Art. 581-1, et se%., Vernon’s Civil Statutes. The 

facts you submitted are as follows: 

A, B and thirty-three other individuals without 

public offering, solicitation or advertising, aause a 

domestic corporation to be formed. The corporation, 

acting by and through its board of directors, accepts 

subscriptions for stock from A and B and the thirtythree other persons, The corporation issues stock to 

A and B and thirty-three other persons through its 

transfer agent, a national bank. All of this stock is 

original issue stock. 

B subsequently receives additional stock in the 

corporation. X then makes a request for stock in the 

corporation to A who refers X to B. B then sells and 

transfers some of his stock to X and others. The total 

number of shareholders exceeds thirty-five when X 

and the others receive their stock in the corporation 

from B. B was not licensed as a securitiee dealer, 

salesman, or agent under any of the provisions of the 

Securities Act at the time the sales in queetion were 

made. The corporation had not registered its stock for 

sale to the public in Texas under any provisions of the 

Securities Act, and the corporation was not registered 

as a corporate securities dealer at the time the sales 

were made. You ask whether A, B, or the corporation 

violated the penal provisions of Section 29 of The 

Securities Act when B sold stock to X and the others. 

-1990- 
_. 

Honorable Tom Blackwell, page 2 (C-423) 

One who Bells unregistered securities or one who 

sells securities without being a licensed dealer, salesman or agent is guilty of having committed a felony 

under the penal provisions. of The Securities Act, Art. 

581-w. The penal provisions of The Securities Act do 

not apply, however, If the transactions involved are 

exempt under The Securities Act, Art. 581-5, which provides: 

"Except as hereinafter in this Ace specifically provided, the provisions of this Act 

shall not apply to the sale of any security 

when made in any of the following transactions and under any of the following conditions, and the company or person engaged therein 

Shall not be deemed 8, dealer within the meaning of this Act; that IS to .Bay, the provlBlonB 

of this Act ahaL not apply to any Bale, 

offer for sale, solicitation, subscription, 

dealing in or delivery of any security under 

any of the following transactions or condltiOn0: 

"C. (1) Sales of securities made by'or 

in behalf of a vendor, whether by dealer or 

other agent, in the ordinary course of bona 

fide personal investmentof the personal 

holdings of such vendor, or change in such 

investment, If such vendor is not engaged in 

the bUBineB0 of selling securities and the 

sale or Bales are isolated tranSaCtiOnBnOt 

made in the course of repeated and BucceBBive 

transactions of a like character; provided, 

that in no event shall such sales or offerings 

be exempt from,the provisions of this Act 

when made or intended by the vendor or his 

agent, for the benefit, either directly or 

indirectly, of any company or corporation 

except the individual vendor (other than a 

usual commission to Said agent), and provided 

further, that any person acting as agent for 

Said vendor shall be registered pursuant to 

this Act; 

" * * * 

-1991- 
.- 

Honorable Tom Blackwe,ll, page 3. (C-423) 

"I. Provided such sale Is made without 

any public solcitation or advertisements, (a) 

the sale of any security by the issuer thereof so long as the total number of security 

holders of the Issuer thereof does not exceed 

thirty-five (35) persons after taking such 

sale into account; (b) the Bale of Share0 of 

stock pursuant to the grant of an employees' 

restricted stock option as defined In the Internal Revenue klWB of the United StateBj or 

(c) the sale by an issuer of Its securities 

duringthe period of twelve (12) months ending with the date of the sale In question to 

not more-than fifteen (15) persons (excluding, in determining such fifteen (15) persons, 

purchasers of securities in transactions exempt under other provisions of this Section 5, 

purchasers of securities exempt under Section 

6 hereof and purchasersof securities which ~. 

are,part of an offering registered under Section 7 hereof), provided such persons purchased such se~curities for their own account 

and not for distribution." 

Whenever securities are Bold under the provision 

of clause (c) of Subsection I of.Artlcle 581-5 of The 

Securities Act, the issuer must file proper notice with 

the Securities Commissioner prior, to making such sale. 

Under the facts, you submitted, the only SUbseCtiOnS 

of Section 5 of The Securities Act which could exempt 

B from the penal provisions of The Securities Act are 

Sections 5(C)(l) and 5(I). There is nothing In the fact 

situation you submitted which would indicate that the 

securities in question are exempt securities under the 

provisions of Section 6 of The Securities Act. 

Whether B'S sales of securities to X and the Other0 

are exempt transactions under Section 5(C)(l) of The 

Securities Act, the following fact questions must be 

determined: 

(1) Whether the sales in question were 

made by or in behalf of,B; 

(2) Whether the sale,s In question were 

made in the course of,a bona fide personal 

investment of the personal holdings of B; 

-1992- 
-. . 

Honorable Tom Blackwell, page 4 (C-423) 

(3) Whether B was in the business of selling securities'at the time the questioned 

sales were made; 

(4) Whether the sales in question were 

Isolated transaotlons not made in the course 

of repeated and Successive transactionej 

(5) Whether any company (especially the 

corporation Involved herein) benefited directly 

or indirectly from the sales in question. 

If any of the stated fact questions are determined 

adversely to B, B’s sales to X and the others would not 

be exempt under Section 5(C)(l) of The Securities Act, 

In determlnlng whether B'S sales to X and the others 

are exempt transactions under Section 5(1')(a), a finding would have to be made on whether the sales were 

actually made through B, either directly or indirectly, 

as part of the corporation's original stock issue. If 

B’s sales to X and the others were a part of the original distribution of the stock of the corporation, and 

were made by and through B as a part of a scheme to 

evade the registration requirements of the Securities 

Act, the sales to X and the others would not be exempt 

transactions under Section 5(I)(a) of the Securities 

Act since the issuer would have sold its stock to more 

than thirty-five persons. Certainly, the Courts will 

not allow the corporation to iSSUe original iSSUe stock 

indirectly without registration when It cannot iB8Ue 

the Stock directly without fulf'llling the registration 

requirements of The Securities Act. The Supreme Court 

held that a corporation doing business in a regulated 

industrr may not do br indirection what It is orohibited from doing by djrectlon. Southwestern Savings and 

Loan Association v. Falkner, 1.60 Tex. 417, 331 S.W.2d 

Il9bO) . 

If It is determined that the stock was actually 

Bold by the corporation through B, there 18 no Question 

that B’S sales to X and the ‘others are not exempt transactions under Section 5(I)(c) as the corporation did 

not file the proper notice with the Securities COlUUliSBiOlle~j 

however, from the facts submitted, we cannot determine 

whether proper notice would have cured this defect since 

you do not give the number of purchasers or the period 

during which they purchased. 

-1993- 
Honorable Tom Blackwell,.page 5,(C-423) 

If it is determined that B's sales to X and the 

others were not exem t 

(11, 5(I)(a), or 5(I P 

transactions under Section 5(C) 

(c), B clearly violated the penal 

provisions of The Securities Act as he was not a licensed 

securities dealer, salesman, or agent, and the corporation's stock was not registered. The facts you submitted 

do not show that A sold stock to X and the others. Un1eSB it is determined that A participated in B's sales 

to X and the Others, A did not' violate the penal provisions 

of The Securities Act. A corporation cannot be indicted 

or tried under the criminal statute0 of Texas. 14 Tex. 

Jur.2d 538, Corporations, Sec. 448. 

It should be'remembered that the State does not 

have to negative the exemptions under Section, 5 in 

drawing an Indictment for violation of The Securities 

Act. Bridges v. State, 360 S.W.2d 531 (Tex.Crim.App. 

1962)., Section 37 f The Securities Act clearly places 

the burden of claim&g and proving an exemption on the 

party claiming such exemption. 

SUMMARY ------- 

Under the conditions submitted, a fact determination must be made whether the Questioned 

Stock Bales were exempt transactions under 

the provisions of,The Securities Act., Art. 

581-5, V.C.S. If it is, determined that the 

stock Bales were not exempt, B Clearly violated 

The Securities Act. A violated the Securities 

Act only if he participated In making the 

questioned stock sales. A corporation iB not 

subject to prosecution for violation of The 

Securities Act. 

Respectfully submitted, 

WAGGONER CARR 

Attorney General of Texas 

JWF: ted 

-1994- 
Honorable Tom Blackwell, page 6 (C-423) 

APROVED By: 

OPINION COMMITTEE 

w. V. Geppht, Chairman 

Paul Phy 

JalneB Strock 

Howard Fender 

Sam Kelley 

APPROVED FOR THE ATTORHEY GENERAL 

By: Stanton Stone 

-1995-