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-
