Texas Small Business Offering Guide to Disclosure

Revised 6/22/18

For Use with the Texas Intrastate Crowdfunding Exemptions

Links to Relevant Rules

Rule 139.26. Intrastate Crowdfunding Exemption for SEC Rule 147A Offerings

Table of Contents


Rule 139.26 Interstate Crowdfunding Exemption for SEC Rule 147A Offerings provides an exemption from the securities registration requirements of the Texas Securities Act. As is the case with all other state and federal securities offerings, there is no exemption from the requirement that an issuer provide full and fair disclosure of all "material" information to prospective investors. More specific information about this important requirement is set forth in the discussion of the Disclosure Statement below.

This Guide is intended to provide some basic assistance in preparing required disclosure information. However, before undertaking a securities offering, an issuer is strongly advised to consult with legal counsel experienced in this area of the law and with an accounting professional to help ensure that the information provided to prospective purchasers adequately describes all material information and meets the issuer's disclosure obligations under the law. Crowdfunding associations, registered Texas crowdfunding portals, or registered general securities dealers participating in crowdfunding offerings may be able to provide assistance in locating professionals with expertise in assisting small businesses with securities offerings.

Exclusive Location of Disclosures

For offerings made under the Texas intrastate crowdfunding exemption, disclosure must be made exclusively through an Internet website operated by a registered Texas crowdfunding portal or general securities dealer. Disclosure is made through the Summary of the Offering (See 139.26(g)(2)(B)), Disclosure Statement (See 139.26(h)), and communications that occur on the website of the Texas crowdfunding portal or general securities dealer. (See 139.26(f)(1)).

Summary of the Offering (See 139.26(g)(2)(B))

The objective of the Summary of the Offering is to provide a brief overview to enable readers to quickly determine the general attributes of an offering. The target offering amount and the time frame for the offering should be prominently disclosed. The issuer should disclose that the Texas crowdfunding exemption requires that offering proceeds must be held in an escrow account or segregated account until the funds raised from purchasers are equal to or greater than the minimum target offering amount specified in the Disclosure Statement. If the target offering amount is not raised by the time specified, all subscription funds must be returned to investors.

The Summary of the Offering must include:

  • A description of the entity, its form of business, principal office, history, business plan, and the intended use of the offering proceeds, including compensation paid to any owner, executive officer, director, or manager;
  • The identity of the executive officers, directors, and managers, including their titles and their prior experience and the identity of all persons owning more than 20% of the ownership interests of any class of securities of the company; and
  • A description of the securities being offered and of any outstanding securities of the company, the amount of the offering, and the percentage ownership of the company represented by the offered securities.

More detailed information about each of these areas of disclosure is set forth in the discussion below relating to the Disclosure Statement.

Disclosure Statement (See 139.26(h))

The Disclosure Statement serves the dual purpose of permitting prospective investors to make informed investment decisions and protecting the issuer and its control persons from later legal claims by purchasers that they were not properly informed of the risks or other material information relating to an offering.

The securities laws require issuers to be truthful in statements made to prospective investors and to affirmatively disclose all material information. The legal standard for "material" is whether there is a substantial likelihood that the information would be viewed by a reasonable investor as significantly altering the total mix of available information used in deciding whether to invest.

It is important to recognize that the law places the burden of disclosure of material information squarely on the issuer and does not require in any way that a prospective investor take steps to independently uncover information not provided by the issuer that would be considered important in making an investment decision.

Failure to comply with the law relating to disclosure poses significant risks for the issuer and its control persons. Depending on the nature of the proceeding, there may be administrative, civil, or criminal liability that results from a securities offering involving an untrue statement of material fact, intentional failure to disclose a material fact, or omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.

As a starting point, the Texas crowdfunding exemptions identify certain specific disclosures that must be made to prospective investors and several general areas of disclosure.

1. Specific Required Disclosures (See 139.26(h)(2))

The following disclosures are specifically required by the Texas crowdfunding exemptions and should be set forth at or near the beginning of the Disclosure Statement:

(a) There is no ready market for the sale of the securities acquired from this offering and it may be difficult or impossible for an investor to sell or otherwise dispose of this investment. An investor may be required to hold and bear the financial risks of this investment indefinitely;

(b) The securities have not been registered under federal or state securities laws and, therefore, cannot be resold unless the securities are registered or qualify for an exemption from registration under federal and state law;

(c) In making an investment decision, investors must rely on their own examination of the issuer and the terms of the offering, including the merits and risks involved; and

(d) No federal or state securities commission or regulatory authority has confirmed the accuracy or determined the adequacy of the Disclosure Statement or any other information on this Internet website.

2. Risk Factors (See 139.26(h)(1))

The Risk factors section of the Disclosure Statement should include a discussion of each material risk to investors specific to the issuer, the offering, the industry in which the issuer operates, or the securities being offered. Generalized statements applicable to all businesses or industries should be avoided. Each risk should be organized under a separate heading and prioritized in order of importance.

Risk factors that are specific to the issuer may include lack of operating history; lack of profitability; management inexperience; dependence on key personnel; dependence on key suppliers or customers; absence of a proven market for a product or service; delinquency in the payment of local, state, or federal taxes; increased risk of loss to investors due to outstanding debt incurred to finance operations, acquire property, or acquire equipment; potential conflicts of interest involving officers, directors, other key persons or affiliates; ongoing or possible litigation; future capital needs, or market competition. Offerings of preferred stock or debt securities may require disclosure of specific risk factors associated with the ability of the issuer to make anticipated dividend, principal, or interest payments.

Risk factors specific to the industry vary by industry and may vary by geographic area in which the issuer does business. For example, with respect to offerings relating to real estate, risk factors may include illiquidity of the investment; the effect that changes in interest rates will have on the profitability of the investment or ability to sell or refinance property; the terms of outstanding indebtedness secured by the property; tenant lease options, cotenant clauses or other factors that may affect tenant renewals; credit standards applied to prospective tenants; credit rating or default risk of existing tenants; or local trends in construction, demographics, property valuation, inventory of existing properties, and rental rates.

Statements made in the risk factors section should not be qualified in a way that minimizes the importance of the stated risks. If explanatory information is needed, it should be addressed in areas of the Disclosure Statement that relate to particular topics, e.g. history of the issuer's operations, management of the company, description of the offering, financial information about the issuer, etc.

3. General Material Information (See 139.26(h)(1))

(a) General description of the issuer's business. An issuer should provide a clear description of its business plan; the goods or services it provides; location of its facilities; sales information; major customers; material terms of key sales contracts and other contractual obligations; competition; trends in the industry; marketing strategies; and the future events that management believes must occur in order for the issuer to meet its business objectives.

Other information requiring disclosure may include a description of the progress of development of a prototype or new product; steps taken to protect intellectual property; description of advertising and other promotional activities; license agreements; the impact if supply for key materials is interrupted or if materials dramatically increase in price; the terms of facility leases including expiration dates and renewal options; and the terms of transactions involving the purchase, lease, or sale of property or equipment to or from an officer, director, stockholder or other key person of the issuer.

(b) History of the issuer's operations and organization. An issuer should disclose the form of its organization, the year it commenced operations, material transactional and financial events in the history of the issuer, relationship of the issuer to other businesses entities that are part of a larger organizational structure, and any anticipated reorganization.

(c) Management of the company and principal stockholders. All officers, directors, or other individuals who have the power to directly or indirectly direct the management or policies of the issuer, whether by contract or otherwise should be identified, and important background information such as education, age, and business experience of these persons should be disclosed. The responsibilities of these individuals should be described in sufficient detail to reflect the relevance of their experience to their designated position. If directors are not elected annually, a description of how and when they are elected should be included.

Principal shareholders of the company should be identified with a description of the number and percentage of shares beneficially owned.

A consultant expected to make a significant contribution to the business of the issuer should be identified. The issuer should disclose the business experience of this person and the material terms of the consulting contract.

If any of the individuals described above are or have been involved in any legal proceeding that is material to an evaluation of the person's ability or integrity, the facts concerning the matter should be disclosed. Such proceedings may include criminal proceedings (other than traffic violations or other minor offenses); personal or business-related bankruptcy or insolvency proceedings; or lawsuits, judgments, court orders, arbitration proceedings, or administrative actions related to a business-related activity.

The Texas crowdfunding exemptions prohibit the use of the exemptions if the issuer, its predecessor, affiliate, or a control person of the issuer has been the subject of certain administrative, civil, or criminal action. (See 139.26(k)(2)).

The issuer should disclose compensation paid to officers, directors, other individuals who have the power to, directly or indirectly, direct the management or policies of the issuer, and consultants expected to make a significant contribution to the business of the issuer. This information should include the salary; bonus; consulting fees; expense accounts; value of any options granted or securities given; terms of any annuity, pension, or retirement benefits; profit-sharing plans; and personal benefits, including club memberships, company cars, or insurance benefits not generally available to employees of the issuer.

The terms of employment contracts or compensatory arrangements activated by the resignation, retirement, termination of employment, or change in a person's responsibilities should be disclosed.

The issuer should disclose any procedure established to respond to the loss of a key person. If applicable, the terms of life insurance payable to the issuer upon the death of a key person should be described.

(d) How the proceeds from the offering will be used. The issuer should disclose the principal reason for the offering, the purposes for which the proceeds of the offering are intended to be used, and the approximate amount intended to be used for each such purpose. Examples of expenditures include payroll; rent; utilities; equipment leases or purchases; legal fees; inventory acquisition; payment of notes; advertising; insurance; supplies; and payments to be made immediately to officers, directors, a registered Texas crowdfunding portal, or registered general securities dealer.

If the offering contemplates a potential range of funding with minimum and maximum amounts, the totals for each by category of expenditure should be set forth in tabular form.

(e) Financial information about the issuer. Disclosure of financial information about the issuer includes current financial statements certified by the principal executive officer to be true and complete in all material respects as required by the Texas crowdfunding rules. If the issuer has audited or reviewed financial statements, prepared within the last three years, such financial statements must also be set forth in the Disclosure Statement. Financial statements are generally comprised of a balance sheet and related statements of income, changes in stockholders' equity, and cash flows, all prepared in accordance with generally accepted accounting principles.

Other material financial information about the issuer may include a discussion of current or anticipated cash flow problems; overdue tax liabilities or other obligations; issues associated with short-term or long-term debt; causes of losses from operations; changes in financial condition over time; and transactions that may materially affect income from operations.

The issuer should seek the assistance of an accounting professional to ensure that all material financial information about the issuer is accurately and completely reflected in the Disclosure Statement.

(f) Description of the securities being offered. Whether the offering involves common stock, preferred stock, limited partnership interests, promissory notes, or interests in a profit sharing agreement, the issuer should disclose the attributes, risks, and rights associated with the securities being offered that are consistent with the statute under which the issuer was organized and the issuer's governance documents. The issuer should also disclose any restrictions on dividends or other distributions and the lack of any rights in the issuer's securities typically granted to securities of the type offered. See also Federal Rule Information below.

(g) Litigation and legal proceedings. The issuer should disclose any material legal proceeding in which it, an affiliated entity, or its property is a party or subject to the proceeding. The disclosure should include the factual basis of the matter, the identity and location of the tribunal in which the proceedings are pending, the date the action was instituted, and the principal parties to the proceeding.

4. Other Material Information

(a) Escrow (See 139.26(e)). The identity and location of the financial institution maintaining an escrow account for the offering and a description of the escrow requirements for the offering should be disclosed. The Texas crowdfunding exemptions require that the offering proceeds be held in an escrow account or segregated account with a bank or other depository institution located in Texas and held until the aggregate capital raised from all purchasers is equal to or greater than the minimum target offering amount specified in the disclosure statement. The rules also require that investors receive a return of all their subscription funds if the target offering amount is not raised by the time stated in the disclosure statement. Additional disclosures to prospective purchasers are required if a segregated account is used to hold investor payments. (See 139.26(e)(6)).

(b) Taxation Issues. The issuer should disclose material aspects of the federal income tax treatment of the issuer and the impact of this treatment on investors.

(c) Limitation of liability. Section 4008.061 of the Texas Securities Act limits the liability of certain individuals involved in small business offerings, as defined by that statute. If the limitation applies, the maximum amount that may be recovered against a person in a civil action brought under Subchapter B of Chapter 4008 of the Texas Securities Act is three times the fee paid by the issuer to the person for the services related to the offer of securities. The limitation does not apply if the trier of fact finds the person engaged in intentional wrongdoing in providing the services.

A "small business issuer" is one that has annual gross revenues not exceeding $25 million and that does not have equity securities registered or required to be registered with the U.S. Securities and Exchange Commission. The limitation applies to offers and sales of a small business issuer's securities that, in an aggregate amount, do not exceed $5 million and a person (including an attorney, accountant, consultant, or the firm of the attorney, accountant, or consultant) who has been engaged to provide services relating to such offers and sales of securities.

To invoke the liability limitation, the small business issuer offering the securities must provide a written disclosure of the limitation of liability created by Section 4008.061 to the prospective buyer and have received a signed acknowledgment from the prospective buyer that the disclosure was provided. This process should be coordinated with the registered portal or registered dealer handling the offering.

(d) Reporting. The issuer should disclose what information about the company's operations will be provided to existing securities holders after the offering of securities has been completed and when that information will be provided. The Texas Business Organizations Code and other provisions in state law may govern the timing and nature of reports required to be submitted to investors.

The issuer should consult with legal counsel to ensure that appropriate disclosures are made and that arrangements are in place to comply with applicable reporting requirements.

(e) Pricing. Consideration should be given to disclosure of the factors used to determine the price of the securities in the offering. Factors may include whether the price was determined arbitrarily or was based on earnings per share, net tangible assets per share, the price previously paid for the issuer's securities by others, or independent appraisal based on sales of comparable property.

(f) Dilution. If applicable, the issuer should disclose how a primary or secondary offering or distribution of securities will dilute an investor's ownership percentage of the company or reduce the value of securities on a per share basis immediately after an offering.

Dilution reduces shareholders' percentage of ownership and can have a diminishing effect on the book value of the common stock, the earnings per share, and the shareholders' ultimate voting power. This is especially the case when the company issues shares to its principal stockholders at prices substantially below the offering price to new shareholders; when holders of options and warrants exercise their rights to purchase additional shares at lower prices than what they paid originally further diluting the valuation on a per share basis; or when debt or preferred stock is converted into additional shares of common stock at prices below the current offering price.

Dilution represents the difference between the current offering price and the net tangible book value per share immediately after a securities offering. Net tangible book value is the amount that results from subtracting total liabilities and intangible assets from total assets of the company.

5. Federal Rule Information

For Rule 139.26 offerings, since Rule 139.26 requires that the securities in an offering comply with SEC Rule 147A, the description of the securities being offered in the disclosure statement should include the disclosure addressing restrictions on resales that is required by subsection (f) of Rule 147A.  Specifically, Rule 147A(f)(3) requires the issuer to prominently disclose the following statement in its offering materials: “Sales will be made only to residents of the state of Texas. Offers and sales of these securities are made under an exemption from registration and have not been registered under the Securities Act of 1933. For a period of six months from the date of the sale by the issuer of the securities, any resale of the securities (or the underlying securities in the case of convertible securities) shall be made only to persons resident within the state of Texas.”  See Rule 147A(f) for other requirements that must be complied with.


During the period in which the offering appears on the website of the registered Texas crowdfunding portal or general securities dealer, the website must provide a mechanism for potential purchasers and investors to communicate with one another and with representatives of the issuer about the offering. These communications must be visible to all those with access to the offering materials on the portal or dealer's website.  (See 139.26(f)(1)).

These communications may serve as a supplement to, but not as a substitute for, the Summary of the Offering and Disclosure Statement required by the Texas crowdfunding exemption rules.

The issuer may distribute a notice within Texas limited to a statement that the issuer is conducting an offering, the name of the registered general dealer or portal through which the offering is being conducted, and a link directing the potential investor to the dealer or portal's Internet website. (See 139.26(f)(2)).