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 Securi-
                                 ties Act by a sale of the
Dear Mr. Blackwell:              securltles in question.

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

     B subsequently receives additional stock in the
corporation.  X then makes a request for stock in the
corporation to A who refers X to B. B then sells and
transfers some of his stock to X and others. The total
number of shareholders exceeds thirty-five when X
and the others receive their stock in the corporation
from B. B was 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 in Texas 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 of The
Securities Act when B sold stock to X and the others.




                             -1990-
                                                           _.




Honorable Tom Blackwell, page 2 (C-423)



     One who Bells unregistered securities or one who
sells securities without being a licensed dealer, sales-
man or agent is guilty of having committed a felony
under the penal provisions. of The Securities Act, Art.
581-w. The penal provisions of The Securities Act do
not apply, however, If the transactions involved are
exempt under The Securities Act, Art. 581-5, which pro-
vides:

        "Except as hereinafter in this Ace speci-
     fically provided, the provisions of this Act
     shall not apply to the sale of any security
     when made in any of the following transac-
    tions and under any of the following condi-
     tions, and the company or person engaged therein
     Shall not be deemed 8, dealer within the mean-
     ing of this Act; that IS to .Bay, the provlBlonB
     of this Act ahaL not apply to any 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 of a 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 is not engaged in
     the bUBineB0 of selling securities and the
     sale or Bales are isolated tranSaCtiOnBnOt
     made in the course of repeated and BucceBBive
     transactions of a like character; provided,
     that in no event shall such sales or offerings
     be exempt from,the provisions of this Act
     when made or intended by the vendor or his
     agent, for the benefit, either directly or
     indirectly, of any 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 or advertisements, (a)
         the sale of any security by the issuer there-
         of 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 In-
         ternal Revenue klWB of the United StateBj  or
          (c) the sale by an issuer of Its securities
         duringthe period of twelve (12) months end-
         ing with the date of the sale In question to
         not more-than fifteen (15) persons (exclud-
         ing, in determining such fifteen (15) persons,
         purchasers of securities in transactions ex-
         empt under other provisions of this Section 5,
         purchasers of securities exempt under Section
         6 hereof and purchasersof securities which ~.
         are,part of an offering registered under Sec-
         tion 7 hereof), provided such persons pur-
         chased such se~curities for their own account
         and not for distribution."

          Whenever securities are Bold under the provision
     of clause (c) of Subsection I of.Artlcle  581-5 of The
     Securities Act, the issuer must file proper notice with
     the Securities Commissioner prior, to making such sale.

          Under the facts, you submitted, the only SUbseCtiOnS
     of Section 5 of The Securities Act which could exempt
     B from the penal provisions of The Securities Act are
     Sections 5(C)(l) and 5(I). There is nothing In the fact
     situation you submitted which would indicate that the
     securities in question are exempt securities under the
     provisions of Section 6 of The Securities Act.

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

             (1) Whether the sales in question were
          made by or in behalf of,B;

             (2) Whether the sale,s In question were
          made in the course of,a bona fide personal
          investment of the personal holdings of B;



                                   -1992-
                                                                  -.   .




Honorable Tom Blackwell, page 4 (C-423)



        (3) Whether B was in the business of sell-
     ing securities'at the time the questioned
     sales were made;

        (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.

     If any of the stated fact questions are determined
adversely to B, B’s sales to X and the others would not
be exempt under Section 5(C)(l) of The Securities Act,

     In determlnlng whether B'S sales to X and the others
are exempt transactions under Section 5(1')(a), a find-
ing would have to be made on whether 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 X and the others were a part of the ori-
ginal distribution of the stock of the corporation, and
were made by and through B as a part 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 to more
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'llling the registration
requirements of The Securities Act. The Supreme Court
held that a corporation doing business in a regulated
industrr may not do br indirection what It is orohi-
bited from doing by djrectlon.   Southwestern Savings and
Loan Association v. Falkner, 1.60 Tex. 417, 331 S.W.2d
    Il9bO) .
     If It is determined that the stock was actually
Bold by the corporation through B, there 18 no Question
that B’S sales to X and the ‘others are not exempt trans-
actions 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 do not give the number of purchasers or the period
during which they purchased.


                               -1993-
Honorable Tom Blackwell,.page    5,(C-423)


     If it is determined that B's sales to X and the
others were not exem t transactions under Section 5(C)
(11, 5(I)(a), or 5(I P (c), B clearly violated the penal
provisions of The Securities Act as he was not a licensed
securities dealer, salesman, or agent, and the corpora-
tion's stock was not registered.    The facts you submitted
do not show that A sold stock to X and the others. Un-
1eSB it is determined that A participated in B's sales
to X and the Others, A did not' violate the penal provisions
of The Securities Act. A corporation cannot be indicted
or tried under the criminal statute0 of Texas. 14 Tex.
Jur.2d 538, Corporations, Sec. 448.

     It should be'remembered that the State does not
have to negative the exemptions under Section, 5 in
drawing an Indictment for violation of The Securities
Act. Bridges v. State, 360 S.W.2d 531 (Tex.Crim.App.
1962)., Section 37 f The 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 determi-
     nation must be made 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 if he participated In making the
     questioned stock sales. A corporation iB not
     subject to prosecution for violation of The
     Securities Act.

                           Respectfully      submitted,

                           WAGGONER CARR
                           Attorney General of Texas




JWF: ted




                                -1994-
Honorable Tom Blackwell, page 6 (C-423)



APROVED By:
OPINION COMMITTEE

w. V. Geppht,   Chairman

Paul Phy
JalneBStrock
Howard Fender
Sam Kelley

APPROVED FOR THE ATTORHEY GENERAL
By: Stanton Stone




                             -1995-
