An issuer seeking to register securities for sale in Texas should complete forms U-1, U-2 and U-2A. Information that must be submitted with the application for registration of securities includes certain exhibits and a filing fee of $100.00 plus an examination fee of 1/10 of 1% of the aggregate amount of securities proposed to be sold in Texas.
The staff of the Agency's Registration Division is available to assist issuers with any questions concerning the registration process.
Registered securities offerings must generally comply with the requirements of Chapter 113 of the Rules. Additionally, Rule 113.14 adopted by reference several of the North American Securities Administrators (NASAA) Statements of Policy (SOP). To view the NASAA SOP's, go to the Statements of Policy ("SOP") for more information. Some of the issues that arise in connection with the review of an application for registration of securities are discussed below:
Investment by Promoters
The promoters of an offering are ordinarily expected to have a reasonable equity investment in the company. Promoters of an offering are required to provide up to 10% of the total equity capital at the conclusion of the offering. Such investment may take the form of retained earnings, cash contribution, or contributed assets. Contributed assets must be valued by a qualified, independent appraiser.
With regard to stock owned by the promoters of an offering, a reasonable relationship should exist between the price per share paid by the promoters and the price at which shares are being offered for sale to the public. If there is a substantial disparity between the price paid by the promoters and the current offering price, promoters may be required to place all or part of their securities in an escrow account.
In order to limit potential dilution of per share equity, per share earnings or a corresponding reduction in market price per share, options and warrants should not exceed 15% of the number of shares outstanding at the conclusion of the offering. Options to those who are not promoters are generally excluded from this limitation if they are otherwise reasonable in terms of their amount and exercise price.
Conflicts of Interest
Offerings are required to be structured in a manner that minimizes the potential conflicts of interest between management and those investors with whom a fiduciary relationship is appropriate. The best way to handle potential conflicts is through independent directors.
All transactions between the company and its officers or directors should be approved by a majority of the independent disinterested directors and determined to be on terms no less favorable to the company than could be obtained in arms-length transactions with unaffiliated third parties. If an asset is being purchased from an affiliate or principal stockholder, an appraisal by a qualified, independent appraiser is required.
Generally, companies may not issue shares of stock that are nonvoting or that have disproportionate voting rights. The Securities Commissioner may consider whether or not the disparity in voting rights is a temporary condition and whether or not the deprived shareholder receives an offsetting benefit to compensate for the disparity.
In determining the minimum offering size, the company should be careful to ensure that minimum offering proceeds are sufficient to implement the company's business plan. The minimum offering size should provide the company with sufficient resources to meet its projected cash needs for the next 12 months.
Limitations are placed on total allowable offering expenses. A maximum of 20% of total offering proceeds may be used to pay offering expenses. Included in the calculation of total offering expenses should be any and all compensation paid to selling agents.
In establishing the minimum offering size, the company should take care to establish an offering size that will ensure compliance with the expense limitations.
In some cases, to ensure compliance with the applicable expense limitations, it may be required that offering proceeds be placed in an escrow account. Generally, the escrow agreement provides for the release of the escrowed funds when the minimum offering has been achieved.
If the company fails to achieve the minimum offering size, the company must return the investors' original investment plus any interest earned on the money while in the escrow. No offering expenses may be deducted from the proceeds or interest earned thereon.
The Offering Period
In determining the length of the offering period, the company should be careful to allow sufficient time to complete the offering. Authorizations for the sale of securities in Texas are usually issued for one year. The company may wish to consider an offering period of equal length. It may be advisable for the company to reserve, in the prospectus, the right to extend the offering period. To extend the offering period, a prospectus amendment, including updated financial statements, must be filed with, and approved by, the State Securities Board.
Generally, debt and preferred stock offerings are not appropriate for relatively new, undercapitalized ventures. The earnings of such new companies are often inadequate to make the regularly scheduled cash payments required for such securities. It may also prove difficult for such companies to repay the principal amount due at the maturity of debt securities. In order to issue debt securities or preferred stock, it is necessary for a company to demonstrate that it is likely, based on historical operations, to be in a position to pay its obligations to the purchasers of such securities. If the company cannot show historical earnings sufficient to cover fixed charges, on a pro forma basis, the company may be unable to demonstrate its ability to fulfill its obligations to these purchasers.
Any claim that a debt security is insured or guaranteed must be absolute and irrevocable. The entity making such guarantee must be able to demonstrate the financial ability to perform on the guarantee.
Debt securities must be offered pursuant to a trust indenture. Given the cost of creating a trust document, it may be economically prohibitive to conduct small debt offerings.
Financial Statement Requirements
Pursuant to Section 7.A(1)(f)(1) of the Act, an issuer is required to submit a balance sheet prepared in accordance with generally accepted accounting principles and audited using generally accepted auditing standards. Such a balance sheet must reflect all assets and liabilities of the issuer as well as the financial condition of the issuer not more than 90 days prior to the date such financial statement is filed.
An issuer's application must also include a detailed income statement, prepared in accordance with generally accepted accounting principles and audited using generally accepted auditing standards, which shall cover the last 3 years of operations of the issuer. If the issuer has been in business less than 3 years, the income statement must cover the time that the issuer has been operating. The income statement must clearly reflect the amount of net income or net loss incurred during each of the years shown.
If the fiscal year-end of the issuer terminated on a date more than 90 days prior to the date of the filing, the financial statements referred to above, which must be as of a date not more than 90 days prior to the date of filing, need not be certified by an independent certified public accountant, if financial statements containing the required information are certified by an independent certified public accountant as of the end of the preceding fiscal year of the issuer and are filed in addition to the non-certified financial statements.
Financial projections are not appropriate for use in a registered offering.
Sales through Registered Sales Agents
Sales must generally be made through a licensed broker-dealer. Under Texas law, the person listed as the contact for investors for questions or to purchase securities must be a registered securities sales agent.
In certain circumstances, the company may elect to sell its securities directly. In this case, the company, as well as one of its officers, must register with the Agency as an issuer-dealer. Additionally, any individual engaged in the selling of the securities must also register with the Agency.