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 bya sale of the Dear Mr. Blackwell: securltles in question.

You have requested an Attorney Qeneral’s Opinion
onwhether, under submitted facts, certain sales of securities have been made In violation ofThe 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 oradvertising, aause a domestic corporation to be formed. The corporation, acting by and through itsboard of directors, accepts subscriptions for stock from Aand B and the thirtythree other persons, The corporation issues stock to Aand B and thirty-three other persons through its transfer agent, anational bank. All of this stock is original issue stock.

B subsequently receives additional stock inthe corporation. X thenmakes

### a request for stock 

### in the corporation to Awho refers X toB. B then sells and transfers some ofhis stock to Xand others. The total number of shareholders exceeds thirty-five when X and the others receive their stock inthe corporation from B. Bwas 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 inTexas 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 ofThe Securities Act when B sold stock to X and the others.

-1990-_.

Honorable Tom Blackwell, page 2 (C-423)

Onewho Bells unregistered securities or onewho sells securities without being a licensed dealer, salesman or agent isguilty ofhaving committed a felony under the penal provisions.ofThe Securities Act, Art. 

### 581-w. The penal provisions ofThe Securities Act do not apply, however, If the transactions involved are exempt under The Securities Act, Art. 

### 581-5,which provides:
"Except ashereinafter in this Ace specifically provided, the provisions of this Act shall not apply to the sale ofany security when made inany of the following transactions and under any of the following conditions, and the company orperson engaged therein Shall not be deemed 8,dealer within themeaning of this Act; that IS to**.Bay,** the provlBlonB of this Act ahaL not apply toany 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 ofa 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 isnot engaged in the bUBineB0 of selling securities and the sale or Bales are isolated tranSaCtiOnBnOt made in the course of repeated and BucceBBive transactions ofa like character; provided, that inno event shall such sales or offerings be exempt from,the provisions of this Act when made or intended by the vendor orhis agent, for the benefit, either directly or indirectly, ofany 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 oradvertisements, (a) the sale ofany 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 endingwith 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 

### 6hereof and purchasersof securities which ~. are,part ofan offering registered under Section 7hereof), provided such persons purchased such se~curitiesfor their own account and not fordistribution."

Whenever securities are Boldunder the provision of clause (c)of Subsection I of.Artlcle 

### 581-5ofThe Securities Act, the issuer must file proper notice with the Securities Commissioner prior,tomaking such sale.

Under the facts,you submitted, the only SUbseCtiOnS of Section 

### 5ofThe Securities Actwhich could exempt B from the penal provisions ofThe Securities Act are Sections 5(C)(l) and 5(I). There **is** nothing Inthe fact situation you submitted which would indicate that the securities inquestion are exempt securities under the provisions of Section 

### 6ofThe Securities Act.

Whether B'S sales of securities to Xand the Other0
are exempt transactions under Section 5(C)(l) ofThe Securities Act, the following fact questions must be determined:

(1) Whether the sales in question were made by or inbehalf of,B;
(2) Whether the sale,sInquestion were made in the course of,a bona fide personal investment ofthe personal holdings of B;

-1992--. .

Honorable Tom Blackwell, page 4 (C-423)

(3) Whether Bwas in the business of selling securities'at the time the questioned sales weremade;
(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.

Ifany of the stated fact questions are determined adversely to B, B’s sales to Xand the others would not be exempt under Section 5(C)(l) ofThe Securities Act,

Indetermlnlng whether B'S sales to X and the others
are exempt transactions under Section 5(1')(a),a findingwould have to bemade onwhether 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 Xand the others were apart of the original distribution of the stock ofthe corporation, and
were made by and through B as apart 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 tomore 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'lllingthe registration requirements ofThe Securities Act. The Supreme Court held that a corporation doing business ina regulated industrr may not do br indirection what It is orohibited from doing by djrectlon. Southwestern Savings and Loan Association v.Falkner, 1.60Tex. 417, 331 S.W.2d Il9bO)
. If It isdetermined that the stockwas actually Bold by the corporation through B, there 18no Question that B’S sales toX and the ‘othersare 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 donot give the number ofpurchasers or the period during which they purchased.

-1993-Honorable Tom Blackwell,.page 

### 5,(C-423)

If it isdetermined that B's sales to X and the others were not exem t (11, 5(I)(a), or 5(IP transactions under Section 5(C) (c),B clearly violated the penal provisions ofThe Securities Act ashe was not a licensed securities dealer, salesman, oragent, and the corporation's stock was not registered. The factsyou submitted donot show that A sold stock to X and the others. Un1eSB it isdetermined that Aparticipated inB's sales to X and the Others, A didnot'violate the penal provisions ofThe Securities Act. A corporation cannot be indicted
or tried under the criminal statute0 ofTexas. 

### 14Tex. Jur.2d 

### 538,Corporations, Sec. 

### 448.

It should be'remembered that the State does not have tonegative the exemptions under Section,

### 5in drawing an Indictment for violation of The Securities Act. Bridges v.State, 360 S.W.2d 531 (Tex.Crim.App. 1962)., Section 

### 37 fThe 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 bemade 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 ifhe participated Inmaking the questioned stock sales. A corporation iBnot subject to prosecution for violation ofThe Securities Act. Respectfully submitted,

WAGGONER CARR Attorney General ofTexas

JWF:ted

-1994-Honorable Tom Blackwell, page 

### 6 (C-423)

APROVED By: OPINION COMMITTEE

w. V. Geppht, Chairman

Paul Phy **JalneB** Strock Howard Fender SamKelley

APPROVED FOR THE ATTORHEY GENERAL By: Stanton Stone

-1995-