A brief description of the exemptions from registration that may be most useful to small businesses is set forth below. Numerous other exemptions are available to issuers in Sections 5 and 6 of the Act and Chapters 109, 111, and 139 of the Board's rules.
When an offer or sale is made from Texas to another jurisdiction, the laws of that jurisdiction must be considered. A transaction that is exempt from registration in Texas may not be exempt elsewhere.
All of the exemptions discussed here are available only to the issuer of the securities. When engaging in an offering pursuant to one of these exemptions, the issuer is not deemed to be a dealer and so is not required to register as such with the Securities Commissioner. Since a business can act only through natural persons, such as its owners, officers or directors, the exemption from dealer registration will extend to these persons acting on behalf of the issuer, but only if they meet three important criteria:
- The person cannot have been hired for the purpose of offering or selling the securities.
- Any securities activities of the person must be incidental to his or her bona fide primary nonsecurities-related work duties.
- The person's compensation must be based entirely on that person's nonsecurities-related duties.
If these criteria are not met, the person offering the securities must be registered with the State Securities Board as a dealer or agent. Similarly, any person that is not an owner, director, officer, or employee of the issuer who offers or sells the issuers securities is subject to the dealer registration provisions of the Act.
Because compliance with all requirements of an exemption is important, the full text of an exemption in the Act or Rules should be carefully reviewed to determine whether an offering will qualify for an exemption.
Even if a securities offering is exempt from registration, all information that would be considered important to an investor in making a decision whether to purchase a security must be fully and fairly disclosed.
Section 5.I(a) of the Act exempts sales by an issuer made without public solicitation or advertisements so long as the total number of security holders, regardless of where they live, does not exceed 35.
Purchasers must be: (1) "sophisticated" and "well-informed,"or (2) "well-informed" with a relationship to the issuer. These terms are defined in Rule 109.13(a).
Section 5.I(c) permits sales to 15 persons in a 12-month period, made without public solicitation or advertisements, in addition to sales made pursuant to registered offerings or pursuant to other exemptions contained in the Act, other than Section 5.I(a) and (b), Rule 109.13(k) and (l), and, for oil and gas offerings,Section 5.Q, Rule 109.14(a)-(b) and Rule 109.14(c).
As with Section 5.I(a), purchasers must be: (1) "sophisticated" and "well-informed," or (2) "well-informed" with a relationship to the issuer.
The exemptions set forth in former Section 5.I(a) and (c) of the Act (now Section 4005.012 of the Act (codified Act)) are self-executing, and therefore do not require a filing or a fee.
Rule 109.13(l), the Intrastate Limited Offering Exemption, exempts sales by issuers or by a registered dealer acting on the issuer's behalf, made without public solicitation or advertisements, if all offers and sales are made in an offering solely within Texas in any 12-month period. Sales may be made to not more than 35 new security holders who are "sophisticated" and "well-informed" as defined in Rule 109.13(a) or who are "well-informed" and have a relationship with the issuer. Additionally, sales may be made to an unlimited number of other "well-informed" investors who are "accredited investors" as defined in Rule 109.13(l)(11).
Under Rule 109.13(l)(4), the exemption is unavailable if the issuer or its registered dealer was the subject of certain regulatory or legal action.
A filing on Form 133.29 is required if sales are made to natural persons other than through a dealer registered in Texas. If this form is required, a filing fee of 1/10 of 1% of the aggregate amount of the securities offered for sale, up to a maximum fee of $500, must be paid.
Rules 109.13(k) & 114.4(b)(1)
Rule 109.13(k), the Uniform Limited Offering Exemption (ULOE), exempts sales by the issuer, or by a registered dealer acting on the issuer's behalf, made in compliance with SEC Rule 506 of Regulation D.
SEC Rule 506 of Regulation D is considered a "safe harbor" for the private offering exemption of Section 4(a)(2) of the Securities Act of 1933. Securities offered in a Rule 506 offering are "covered securities" and are not subject to registration in Texas.
There are two distinct exemptions that fall under Rule 506 of Regulation D:
- Rule 506(b) exempts sales by the issuer or by a registered dealer acting on the issuer's behalf to up to 35 non-accredited investors and to an unlimited number of accredited investors. No public solicitation or advertisements may be made in connection with the offering.
- Under Rule 506(c), a company can broadly solicit and generally advertise, but still be deemed to be undertaking a private offering if the investors in the offering are all accredited investors and the issuer has taken reasonable steps to verify that its investors are accredited investors.
Issuers relying on the Rule 506 exemption can raise an unlimited amount of money. For either exemption, a notice filing must be made with the Securities Commissioner no later than 15 days after the first such sale in Texas. Also, a filing fee of 1/10 of 1% of the aggregate amount of the offering, up to a maximum fee of $500, must be filed. More information on how to file a Form D and the related fee can be found here.
No commissions, fees or other form of remuneration may be paid to any person who solicits investors in Texas under Rule 506 unless that person is licensed in Texas as a securities dealer or agent.
Oil and Gas Limited Offerings
Section 5.Q of the Act, and related Rule 109.14, exempt the sale of oil and gas interests if the total number of sales by the owner does not exceed 35 within a period of 12 consecutive months and no use is made of advertisements or public solicitation. If sales are made by an agent for the owner, the agent must be licensed as a securities dealer or agent of a securities dealer. Under Rule 109.14(b) an employee of an owner may, without being registered, assist the owner in selling oil and gas interests if:
- The employee was not hired for the purpose of offering or selling the securities;
- The employee's securities-related activities are strictly incidental to primary nonsecurities-related work duties; and
- The employee's compensation is based solely on the performance of nonsecurities-related work duties.
Offerings to Accredited Investors
Rule 139.16, the individual accredited investor exemption, exempts sales by the issuer itself, or by a registered dealer acting on the issuer's behalf, to individual accredited investors. An "individual accredited investor" is a natural person whose individual net worth, or joint net worth with that person's spouse, at the time of the purchase exceeds $1 million, or any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.
Sales may be made by directors, officers, or employees of an issuer if they were not hired for the purpose of selling the securities, their securities sales activity is strictly incidental to their bona fide primary nonsecurities-related work duties and their compensation is based solely on the performance of other such duties.
An issuer may use a "limited use" advertisement to sell the offering to individual accredited investors. Such an advertisement must be filed with the Securities Commissioner 10 days prior to its use in Texas. There is no filing fee associated with this exemption. The content of the advertisement is limited by the Rule to a brief description of the securities, contact information, and a required statement.
The Rule specifies that the use of the limited use advertisement will not render other limited offering exemptions prohibiting public solicitation or advertisements unavailable for sales made more than six months after the use of the limited use advertisement.
Upon request, an issuer relying on the exemption is required to furnish to the Securities Commissioner the information furnished to offerees. In addition, an issuer must retain, for a period of at least three years, evidence of the basis for the belief that all purchasers were accredited investors at the time of their purchase.
The exemption is unavailable if the issuer or its registered dealer has been the subject of certain legal actions.
Rule 139.19 is a uniform exemption from the securities registration requirements of the Act for the sale of securities by an issuer to accredited investors. The exemption is not available to an issuer that is in the development stage that either has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person.
As with Rule 139.16, sales may be made by directors, officers, or employees of an issuer if they were not hired for the purpose of selling the securities, their securities sales activity is strictly incidental to their bona fide primary nonsecurities-related work duties and their compensation is based solely on the performance of other such duties.
The Rule permits the use of a published announcement in connection with offerings under the Rule. The content of the announcement is limited by the Rule to certain information about the issuer, the securities offered, contact information, and a required statement.
The issuer may provide information in addition to the general announcement, if that information is delivered through an electronic database that is restricted to persons who have prequalified as accredited investors or is delivered after the issuer reasonably believes that the prospective purchaser is an accredited investor.
No telephone solicitation is permitted unless, prior to placing the call, the issuer reasonably believes that the prospective purchaser to be solicited is an accredited investor.
A Notice of Transaction, consent to service of process, and a copy of the general announcement must be filed with the Texas Securities Commissioner within 15 days after the first sale in Texas. There is no filing fee associated with this exemption.
The exemption is unavailable if the issuer or its registered dealer has been the subject of certain legal actions.
Offerings Using the Internet
Rule 139.17 exempts offers of securities disseminated through the Internet if the offer indicates that the securities are not being offered for sale to any person in Texas, the offer is not specifically directed to any person in Texas by, or on behalf of, the issuer, and no sales of the issuer's securities are made to any person in Texas as a result of the offer. This is accomplished by including a statement the same as, or substantially similar to one of the following:
- "These securities are not being offered or sold in Texas."
- "These securities are being offered or sold in (fill in names of states other than Texas)."
- "This is neither a solicitation to buy nor an offer to sell to persons in Texas."
This Rule was designed to provide a way for persons to use the Internet for securities offerings and avoid inadvertently violating the Act. Persons who use the Internet to offer securities to Texas residents or to sell securities from Texas are held to the same standards and registration requirements as persons engaging in such activities in a more traditional manner. Many jurisdictions have adopted a similar exemption.