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
$432,500.00 efter deduction of the underwriting dis-
counts and commissions. Whils the company has a fair
earn1 record and has pa.id i-ividends of .V per share
In 194..Y$ the net asset val.ue of the stockla ai;proxi-
matelg 2.12 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 psc-
vfsions 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 ques-
tion 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 mls-
representation and failure to dlsclose material facts
as might be considered fraudulent under the definl-
tlon 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 Secre-
tary 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?, under-
writer, or dealer P seeking to qualify the secudtles
appears unfair, unjust, and InequItable upon consider-
ation 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 author-
ity of the Secretary of State to grant or deny an application
for a permit for the sale of securities, and.,,said fact sltua-
tlon is presented solely for the purpose oPstating the ques-
tion 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 promo-
tion 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.
e ‘iocation or ft5 princ:ipal. GfrfC+ and of all
1 c h off;:%3
bran 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 part-
nership or assotlat.i.on, as the case may be, and of any amend-
ments 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, B
the amount of cash to be pa 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 organiza-
tion 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, terri-
tory 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 ap-
pears 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 hear-
ing. 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 author-
izing It to issue and dispose of such securities.”
Hon. Claude Isbell, Page 8 (o-6515)
We first must determine what constitutes the “pro-
posed 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 organ-
ization not recognized in the State. The per-
mission 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 secur-
ities, 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 securi-
ties is so out of line with their actual value as to make the
selling profit on same “so gross or exorbitant as to be
unconscionable.” 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,
ATTORNEYGFXERAL OF TEXAS
BY /s/ Robert L. Lattlmon$Jr.
Robert L. Lattlmore, Jr.
Assistant
RLL:LJ -dhs
APPROVED APR. 30, 1945 APPROVBD
/s/ Carlos C. Ashley OPINION
FIRST ASSISTAN’I ATTORNEY(IENERAL COMMITTEE
BY L.P.L.
C-