1-1 By: Crownover (Senate Sponsor - Fraser) H.B. No. 3015 1-2 (In the Senate - Received from the House April 30, 2001; 1-3 May 1, 2001, read first time and referred to Committee on Business 1-4 and Commerce; May 10, 2001, reported favorably by the following 1-5 vote: Yeas 6, Nays 0; May 10, 2001, sent to printer.) 1-6 A BILL TO BE ENTITLED 1-7 AN ACT 1-8 relating to regulation of the issuance of a security to a 1-9 charitable organization. 1-10 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-11 SECTION 1. Section 5, The Securities Act (Article 581-5, 1-12 Vernon's Texas Civil Statutes), is amended to read as follows: 1-13 Sec. 5. EXEMPT TRANSACTIONS. Except as hereinafter in this 1-14 Act specifically provided, the provisions of this Act shall not 1-15 apply to the sale of any security when made in any of the following 1-16 transactions and under any of the following conditions, and the 1-17 company or person engaged therein shall not be deemed a dealer 1-18 within the meaning of this Act; that is to say, the provisions of 1-19 this Act shall not apply to any sale, offer for sale, solicitation, 1-20 subscription, dealing in or delivery of any security under any of 1-21 the following transactions or conditions: 1-22 A. At any judicial, executor's, administrator's, 1-23 guardian's or conservator's sale, or any sale by a receiver or 1-24 trustee in insolvency or bankruptcy. 1-25 B. The sale by or for the account of a pledge holder 1-26 or mortgagee, selling or offering for sale or delivery in the 1-27 ordinary course of business to liquidate a bona fide debt, of a 1-28 security pledged in good faith as security for such debt. 1-29 C. (1) Sales of securities made by or in behalf of a 1-30 vendor, whether by dealer or other agent, in the ordinary course of 1-31 bona fide personal investment of the personal holdings of such 1-32 vendor, or change in such investment, if such vendor is not engaged 1-33 in the business of selling securities and the sale or sales are 1-34 isolated transactions not made in the course of repeated and 1-35 successive transactions of a like character; provided, that in no 1-36 event shall such sales or offerings be exempt from the provisions 1-37 of this Act when made or intended by the vendor or his agent, for 1-38 the benefit, either directly or indirectly, of any company or 1-39 corporation except the individual vendor (other than a usual 1-40 commission to said agent), and provided further, that any person 1-41 acting as agent for said vendor shall be registered pursuant to 1-42 this Act; 1-43 (2) Sales by or on behalf of any insurance 1-44 company subject to the supervision or control of the Texas 1-45 Department of Insurance of any security owned by such company as a 1-46 legal and bona fide investment, provided that in no event shall any 1-47 such sale or offering be exempt from the provisions of this Act 1-48 when made or intended, either directly or indirectly, for the 1-49 benefit of any other company as that term is defined in this Act. 1-50 D. The distribution by a corporation of securities 1-51 direct to its stockholders as a stock dividend or other 1-52 distribution paid out of earnings or surplus. 1-53 E. Any offer and any transaction pursuant to any offer 1-54 by the issuer of its securities to its existing security holders 1-55 (including persons who at the time of the transaction are holders 1-56 of convertible securities or nontransferable warrants) if no 1-57 commission or other remuneration (other than a stand-by commission) 1-58 is paid or given directly or indirectly for soliciting any security 1-59 holder in this State. 1-60 F. The issue in good faith of securities by a company 1-61 to its security holders, or creditors, in the process of a bona 1-62 fide reorganization of the company made in good faith, or the issue 1-63 in good faith of securities by a company, organized solely for the 1-64 purpose of taking over the assets and continuing the business of a 2-1 predecessor company, to the security holders or creditors of such 2-2 predecessor company, provided that in either such case such 2-3 securities are issued in exchange for the securities of such 2-4 holders or claims of such creditors, or both, and in either such 2-5 case security holders or creditors do not pay or give or promise 2-6 and are not obligated to pay or give any consideration for the 2-7 securities so issued other than the securities of or claims against 2-8 said company or its predecessor then held or owned by them. 2-9 G. The issue or sale of securities (a) by one 2-10 corporation to another corporation or the security holders thereof 2-11 pursuant to a vote by one or more classes of such security holders, 2-12 as required by the certificate of incorporation or the applicable 2-13 corporation statute, in connection with a merger, consolidation or 2-14 sale of corporate assets, or (b) by one corporation to its own 2-15 stockholders in connection with the change of par value stock to no 2-16 par value stock or vice versa, or the exchange of outstanding 2-17 shares for the same or a greater or smaller number of shares; 2-18 provided that in any such case such security holders do not pay or 2-19 give or promise and are not obligated to pay or give any 2-20 consideration for the securities so issued or sold other than the 2-21 securities of the corporation then held by them. 2-22 H. The sale of any security to any bank, trust 2-23 company, building and loan association, insurance company, surety 2-24 or guaranty company, savings institution, investment company as 2-25 defined in the Investment Company Act of 1940, small business 2-26 investment company as defined in the Small Business Investment Act 2-27 of 1958, as amended, or to any registered dealer actually engaged 2-28 in buying and selling securities. 2-29 I. Provided such sale is made without any public 2-30 solicitation or advertisements: 2-31 (a) the sale of any security by the issuer 2-32 thereof so long as the total number of security holders of the 2-33 issuer thereof does not exceed thirty-five (35) persons after 2-34 taking such sale into account; 2-35 (b) the sale or distribution by an employer or 2-36 its participating subsidiary, if any, of a security under a thrift, 2-37 savings, stock purchase, retirement, pension, profit-sharing, 2-38 option, bonus, appreciation right, incentive, or similar employee 2-39 benefit plan for employees or directors of the employer or its 2-40 subsidiary; or 2-41 (c) the sale by an issuer of its securities 2-42 during the period of twelve (12) months ending with the date of the 2-43 sale in question to not more than fifteen (15) persons (excluding, 2-44 in determining such fifteen (15) persons, purchasers of securities 2-45 in transactions exempt under other provisions of this Section 5, 2-46 purchasers of securities exempt under Section 6 hereof and 2-47 purchasers of securities which are part of an offering registered 2-48 under Section 7 hereof), provided such persons purchased such 2-49 securities for their own account and not for distribution. 2-50 J. Wherein the securities disposed of consist 2-51 exclusively of notes or bonds secured by mortgage or vendor's lien 2-52 upon real estate or tangible personal property, and the entire 2-53 mortgage is sold or transferred with all of the notes or bonds 2-54 secured thereby in a single transaction. 2-55 K. Any security or membership issued by a corporation 2-56 or association, organized exclusively for religious, educational, 2-57 benevolent, fraternal, charitable, or reformatory purposes and not 2-58 for pecuniary profit, and no part of the net earnings of which 2-59 inures to the benefit of any stockholder, shareholder, or 2-60 individual members, and where no commission or remuneration is paid 2-61 or given or is to be paid or given in connection with the 2-62 disposition thereof. 2-63 L. The sale by the issuer itself, or by a registered 2-64 dealer, of any security issued or guaranteed by any bank organized 2-65 and subject to regulation under the laws of the United States or 2-66 under the laws of any State or territory of the United States, or 2-67 any insular possession thereof, or by any savings and loan 2-68 association organized and subject to regulation under the laws of 2-69 this State, or the sale by the issuer itself of any security issued 3-1 by any federal savings and loan association. 3-2 M. The sale by the issuer itself, or by a registered 3-3 dealer, of any security either issued or guaranteed by the United 3-4 States or by any territory or insular possession thereof, or by the 3-5 District of Columbia, or by any state of the United States, or 3-6 political subdivision thereof (including but not limited to any 3-7 county, city, municipal corporation, district, or authority), or by 3-8 any public or governmental agency or instrumentality of any of the 3-9 foregoing. 3-10 N. The sale and issuance of any securities issued by 3-11 any farmers' cooperative marketing association organized under 3-12 Chapter 52, Agriculture Code, or the predecessor of that law 3-13 (Article 5737 et seq., Revised Statutes); the sale and issuance of 3-14 any securities issued by any mutual loan corporation organized 3-15 under Chapter 54, Agriculture Code, or the predecessor of that law 3-16 (Article 2500 et seq., Revised Statutes); the sale and issuance of 3-17 any equity securities issued by any cooperative association 3-18 organized under the Cooperative Association Act, as amended 3-19 (Article 1396-50.01, Vernon's Texas Civil Statutes); and the sale 3-20 of any securities issued by any farmers' cooperative society 3-21 organized under Chapter 51, Agriculture Code, or the predecessor of 3-22 that law (Article 2514 et seq., Revised Statutes). Provided, 3-23 however, this exemption shall not be applicable to agents and 3-24 salesmen of any farmers' cooperative marketing association, mutual 3-25 loan corporation, cooperative association, or farmers' cooperative 3-26 society when the sale of such securities is made to non-members, or 3-27 when the sale of such securities is made to members or non-members 3-28 and a commission is paid or contracted to be paid to the said 3-29 agents or salesmen. 3-30 O. The sale by a registered dealer of outstanding 3-31 securities provided that: 3-32 (1) Such securities form no part of an unsold 3-33 allotment to or subscription by such dealer as a participant in the 3-34 distribution of such securities by the issuer thereof; and 3-35 (2) Securities of the same class, of the same 3-36 issuer, are outstanding in the hands of the public; and 3-37 (3) Such securities are offered for sale, in 3-38 good faith, at prices reasonably related to the current market 3-39 price of such securities at the time of such sale; and 3-40 (4) No part of the proceeds of such sale are 3-41 paid directly or indirectly to the issuer of such securities; and 3-42 (5) Such sale is not directly or indirectly for 3-43 the purposes of providing or furthering any scheme to violate or 3-44 evade any provision of this Act; and 3-45 (6) The right to sell or resell such securities 3-46 has not been enjoined by any court of competent jurisdiction in 3-47 this State by proceedings instituted by an officer or agency of 3-48 this State charged with enforcement of this Act; and 3-49 (7) The right to sell such securities has not 3-50 been revoked or suspended by the commissioner under any of the 3-51 provisions of this Act, or, if so, revocation or suspension is not 3-52 in force and effect; and 3-53 (8) At the time of such sale, the issuer of such 3-54 securities shall be a going concern actually engaged in business 3-55 and shall then be neither in an organization stage nor in 3-56 receivership or bankruptcy; and 3-57 (9) Such securities or other securities of the 3-58 issuer of the same class have been registered by qualification, 3-59 notification or coordination under Section 7 of this Act; or at the 3-60 time of such sale at least the following information about the 3-61 issuer shall appear in a recognized securities manual or in a 3-62 statement, in form and extent acceptable to the commissioner, filed 3-63 with the commissioner by the issuer or by a registered dealer: 3-64 (a) A statement of the issuer's principal 3-65 business; 3-66 (b) A balance sheet as of a date within eighteen 3-67 (18) months of the date of such sale; and 3-68 (c) Profit and loss statements and a record of 3-69 the dividends paid, if any, for a period of not less than three (3) 4-1 years prior to the date of such balance sheet or for the period of 4-2 existence of the issuer, if such period of existence is less than 4-3 three (3) years. 4-4 The term "recognized securities manual" means a nationally 4-5 distributed manual of securities that is approved for use hereunder 4-6 by the Board. 4-7 The Commissioner may issue a stop order or by order prohibit, 4-8 revoke or suspend the exemption under this Subsection O with 4-9 respect to any security if the Commissioner has reasonable cause to 4-10 believe that the plan of business of the issuer of such security, 4-11 the security, or the sale thereof would tend to work a fraud or 4-12 deceit upon any purchaser or purchasers thereof, such order to be 4-13 subject to review in the manner provided by Section 24 of this Act. 4-14 Notice of any court injunction enjoining the sale, or resale, of 4-15 any such security, or of an order revoking or suspending the 4-16 exemption under this subdivision with respect to any security, 4-17 shall be delivered or shall be mailed by certified or registered 4-18 mail with return receipt requested, to any dealers believed to be 4-19 selling, or offering for sale, securities of the type referred to 4-20 in the notice; and the prohibitions of (6) and (7) above of this 4-21 Subsection O shall be inapplicable to any dealer until the dealer 4-22 has received actual notice from the commissioner of such revocation 4-23 or suspension. 4-24 The Board may for cause shown revoke or suspend the 4-25 recognition hereunder of any manuals previously approved under this 4-26 Subsection but no such action may be taken unless upon notice and 4-27 opportunity for hearing before the Board or a hearings officer as 4-28 now or hereafter required by law. A judgment sustaining the Board 4-29 in the action complained of shall not bar after one year an 4-30 application by the plaintiff for approval of its manual or manuals 4-31 hereunder, nor shall a judgment in favor of the plaintiff prevent 4-32 the Board from thereafter revoking such recognition for any proper 4-33 cause which may thereafter accrue or be discovered. 4-34 P. The execution by a dealer of an unsolicited order 4-35 for the purchase of securities, where the initial offering of such 4-36 securities has been completed and provided that the dealer acts 4-37 solely as an agent for the purchaser, has no direct or indirect 4-38 interest in the sale or distribution of the security ordered, and 4-39 receives no commission, profit, or other compensation from any 4-40 source other than the purchaser. 4-41 Q. The sales of interests in and under oil, gas or 4-42 mining leases, fees or titles, or contracts relating thereto, where 4-43 (1) the total number of sales by any one owner of interests, 4-44 whether whole, fractional, segregated or undivided in any single 4-45 oil, gas or mineral lease, fee or title, or contract relating 4-46 thereto, shall not exceed thirty-five (35) within a period of 4-47 twelve (12) consecutive months and (2) no use is made of 4-48 advertisement or public solicitation; provided, however, if such 4-49 sale or sales are made by an agent for such owner or owners, such 4-50 agent shall be licensed pursuant to this Act. No oil, gas or 4-51 mineral unitization or pooling agreement shall be deemed a sale 4-52 under this Act. 4-53 R. The sale by the issuer itself, or by a subsidiary 4-54 of such issuer, of any securities which would be exempt if sold by 4-55 a registered dealer under Section 6 (other than Section 6E) of this 4-56 Act. 4-57 S. The sale by or through a registered dealer of any 4-58 option if at the time of the sale of the option: 4-59 (1) the performance of the terms of the option 4-60 is guaranteed by any broker-dealer registered under the federal 4-61 Securities Exchange Act of 1934, as amended, which guaranty and 4-62 broker-dealer are in compliance with such requirements or 4-63 regulations as may be approved or adopted by the board; 4-64 (2) the option is not sold by or for the benefit 4-65 of the issuer of the security which may be purchased or sold upon 4-66 exercise of the option; 4-67 (3) the security which may be purchased or sold 4-68 upon exercise of the option is either (a) exempted under Subsection 4-69 F of Section 6 of this Act or (b) quoted on the National 5-1 Association of Securities Dealers Automated Quotation system and 5-2 meets the requirements of Paragraphs (1), (6), (7), and (8) of 5-3 Subsection O of Section 5 of this Act; and 5-4 (4) such sale is not directly or indirectly for 5-5 the purposes of providing or furthering any scheme to violate or 5-6 evade any provisions of this Act. 5-7 For purposes of this subsection the term "option" shall mean 5-8 and include any put, call, straddle, or other option or privilege 5-9 of buying or selling a specified number of securities at a 5-10 specified price from or to another person, without being bound to 5-11 do so, on or prior to a specified date, but such term shall not 5-12 include any option or privilege which by its terms may terminate 5-13 prior to such specified date upon the occurrence of a specified 5-14 event. 5-15 T. Such other transactions or conditions as the board 5-16 by rule, regulation, or order may define or prescribe, 5-17 conditionally or unconditionally. 5-18 U. The issuance or transfer of securities by the 5-19 issuer of its securities to a corporation or association, organized 5-20 exclusively for religious, educational, benevolent, fraternal, 5-21 charitable, or reformatory purposes and not for pecuniary profit, 5-22 only if: 5-23 (a) the corporation or association does not 5-24 provide anything of value for the securities other than, in the 5-25 case of any security that is an option, payment of the exercise 5-26 price of the option to acquire the securities at a price not to 5-27 exceed the fair market value of the underlying securities on the 5-28 date the option was granted; 5-29 (b) the issuance or transfer of securities is 5-30 not made for the purpose of raising capital for the issuer; 5-31 (c) no commission or other form of consideration 5-32 is paid or provided to a third party with respect to the issuance 5-33 or transfer; and 5-34 (d) the issuance or transfer is not directly or 5-35 indirectly for the purpose of providing or furthering a scheme in 5-36 violation of or to evade this Act. 5-37 SECTION 2. This Act takes effect immediately if it receives 5-38 a vote of two-thirds of all the members elected to each house, as 5-39 provided by Section 39, Article III, Texas Constitution. If this 5-40 Act does not receive the vote necessary for immediate effect, this 5-41 Act takes effect September 1, 2001. 5-42 * * * * *