Revised 6/12/2018

Links to Relevant Rules

Board Rule 139.26. Intrastate Crowdfunding Exemption for SEC Rule 147A Offerings.

SEC Rule 147A. Intrastate Sales Exemption.

Table of Contents

Scope of the Exemption.

An issuer is not required to register its securities offered and sold through a registered general dealer or a registered Texas crowdfunding portal (TCP), if all sales are made to Texas residents and all the requirements of Rule 139.26 and SEC Rule 147A are satisfied. See Rule 139.26(a).

Offers and sales of securities in Texas must be registered with the Texas State Securities Board (TSSB) and the U.S. Securities and Exchange Commission (SEC) unless both a state and a federal exemption from registration are available. Section 37 of the Texas Securities Act places the burden of proof on a person claiming an exemption to prove up the availability of the exemption. Failure to register when registration is required can result in criminal, civil, and/or administrative action being taken against the violator as well as control persons of the violator and persons who aid in the violation.

Issuer Eligibility.

Rule 139.26 is only available if the issuer of the securities is, at the time of the offering and sales, both (a) a Texas resident, and (b) doing business in Texas. See Rule 147A(c).

The issuer is considered to be a Texas resident if it has its principal place of business in Texas.  An issuer's principal place of business is where its officers, partners, or managers primarily direct, control, and coordinate the activities of the issuer.  See Rule 147A(c)(1).

An issuer is considered to be doing business in Texas if it meets one of the following requirements:

  • At least 80% of the issuer's gross revenues are derived from the operation of a business in Texas. See Rule 147A(c)(2)(i).
  • At least 80% of the issuer's assets are located in Texas. See Rule 147A(c)(2)(ii).
  • At least 80% of the net proceeds of this offering will be used in connection with the operation of the issuer's business in Texas.  See Rule 147A(c)(2)(iii).
  • A majority of the issuer’s employees are based in Texas. See Rule 147A(c)(2)(iv).

More information on how these tests are met can be found in SEC Rule 147A(c).

Certain issuers are not permitted to use the Rule 139.26 exemption. These include issuers that are, either before or because of the offering:

  • engaged in or propose to engage in the business of investing, reinvesting, owning, holding, or trading in securities. Such a company would probably be an investment company;
  • subject to the reporting requirements of the Securities and Exchange Act of 1934, Section 13 or Section 15(d), 15 U.S.C. §78m and §78o(d). These are generally referred to as SEC reporting companies; or
  • a company that has not yet defined its business operations, has no business plan, has no stated goal for the funds being raised, or that plans to engage in a merger or acquisition with an unspecified business entity. These types of companies are usually referred to as blank check companies or blind pools.

See Rule 139.26(b) and SEC Rule 147A(a).

Disqualifications - bad actors

An issuer cannot use the exemption in Rule 139.26 if the issuer, the issuer's predecessors, any affiliated issuer, or any control person of the issuer is subject to certain disqualifications arising from past violations of the law. "Control person" in this context means an officer; director; other person having the power, directly or indirectly, to direct the management or policies of the issuer, whether by contract or otherwise; or a person that owns 20% or more of any class of the outstanding securities of the issuer. Rule 139.26(k).

A disqualification occurs if any of the above-identified persons or entities:

  • within the last five years, has filed a registration statement which is the subject of a currently effective registration stop order entered by any state securities administrator or the SEC;
  • within the last five years, has been convicted of any criminal offense in connection with the offer, purchase, or sale of any security, or involving fraud or deceit;
  • is currently subject to any state or federal administrative enforcement order or judgment, entered within the last five years, finding fraud or deceit in connection with the purchase or sale of any security; or
  • is currently subject to any order, judgment, or decree of any court of competent jurisdiction, entered within the last five years, temporarily, preliminarily, or permanently restraining or enjoining such party from engaging in or continuing to engage in any conduct or practice involving fraud or deceit in connection with the purchase or sale of any security.

See Rule 139.26(k)(2).

These disqualifications are considered to be automatically waived if:

  • the party subject to the disqualification is licensed or registered to conduct securities-related business in the jurisdiction in which the order, judgment, or decree creating the disqualification was entered against such party;
  • prior to any offers under Rule 139.26, the disqualification is waived by the state securities administrator or the court or regulatory authority that entered the order, judgment, or decree; or
  • the issuer establishes it did not know and exercising reasonable care, based on a factual inquiry, could not have known that a disqualification existed.

See Rule 139.26(k)(3).

Disqualifications - other offerings.

An issuer cannot use the exemption in Rule 139.26 if the issuer or any control person of the issuer has been involved in certain other securities offerings. "Control person" in this context means an officer; director; other person having the power, directly or indirectly, to direct the management or policies of the issuer, whether by contract or otherwise; or a person that owns 20% or more of any class of the outstanding securities of the issuer. Rule 139.26(k).

Rule 139.26 is not available to an issuer if:

  • a control person of the issuer is also a control person of another issuer that has made a securities offering in Texas within the previous 12-month period;
  • a control person of the issuer is also a control person of another issuer that is concurrently conducting a securities offering in Texas; or
  • the proceeds of the offering will be combined with the proceeds of a securities offering by another issuer as part of a single plan of financing.

See Rule 139.26(k)(4).

Filing requirement.

Before the issuer's securities offering can appear on the TCP's or general dealer's website, the issuer must make a notice filing with the Securities Commissioner. The filing consists of Form 133.21, Crowdfunding Exemption Notice, the issuer's disclosure statement, summary of the issuer's offering that will appear on the Internet website, and a copy of the Account Agreement if investor funds will be deposited into a segregated account. See Rule 139.26(i).

The issuer's information may include a video that appears on the same Internet website on which the issuer's offering appears. To the extent that the video includes information required in the disclosure statement or the offering summary it should be treated as part of those documents and included as part of the notice filing made by the issuer with the Securities Commissioner.

Coordination with SEC Rule 147A exemption for intrastate sales.

So that the securities offered and sold have an exemption from securities registration at the federal level, the securities offering made under Rule 139.26 must also be in compliance with the federal exemption for intrastate offerings in SEC Rule 147A.  See Rule 139.26(a).

The exemption provided by SEC Rule 147A is for offers and sales of and issuer's securities using general solicitation and general advertising that are sold only to persons resident within a single State, where the issuer is both a resident of and doing business within such State. This provisions of the federal law should be carefully reviewed as compliance with the federal exemption is a requirement for the Rule 139.26 exemption. See Rule 139.26(a).

Manner of offering.

Exclusively on the Internet.

Offers and sales of an issuer's securities must be made exclusively through an Internet website operated by a registered general dealer or a registered TCP. Rule 139.26(c).

Maximum amount raised.

The maximum amount that can be raised by an issuer in a 12-month period pursuant to the Rule 139.26 exemption is $1 million. This amount is reduced by the aggregate amount of securities sales by the issuer in any other securities offerings that take place within the six months before the Rule 139.26 offering; during the Rule 139.26 offering; and within six months following the close of the Rule 139.26 offering. See Rule 139.26(c). This provision was designed to provide some certainty by identifying certain types of offers and sales of securities which will not be integrated with and deemed to be part of the exempt offering.

The determination of whether offers, offers to sell, offers for sale, and sales are part of the same offering by the issuer (i.e., are deemed to be integrated) is a question of fact and will depend on the particular circumstances. In determining whether offers and sales should be regarded as part of the same offering and thus should be integrated, any one or more of the following factors may be determinative:

  • Are the offerings part of a single plan of financing?
  • Do the offerings involve the issuance of the same class of securities?
  • Are the offerings made at or about the same time?
  • Is the same type of consideration to be received?
  • Are the offerings made for the same general purpose?

Example 1: An issuer could conduct a Rule 139.26 exempt offering and raise $300,000 (Offering A) over a three-month offering period. The issuer could immediately conduct a second Rule 139.26 offering and raise an additional $500,000 (Offering B) over the next six months. These two Rule 139.26 offerings would not exceed the $1 million cap in a 12-month period (a total of $800,000 was raised over nine months). If the issuer wanted to raise an additional $400,000 using Rule 139.26,   it would need to wait until twelve months after Offering A concluded. An offering prior to that time would exceed the $1 million cap permitted under Rule 139.26.

The calculations become more complicated if the issuer has raised money in other securities offerings that don't involve Rule 139.26.

Example 2: An issuer made a private offering to friends, employees, and family (Offering #1) using the exemption in Section 5.I(a) of the Texas Securities Act and raised $150,000. Two months after Offering #1 concludes the issuer wants to raise additional monies by conducting an intrastate crowdfunding offering using Rule 139.26. Since Offering #1 occurred within six months prior to when the Rule 139.26 offering begins, the maximum the issuer could raise in the Rule 139.26 offering would be $850,000 ($1,000,000 Rule 139.26 cap less the $150,000 raised in another offering occurring within six months before the Rule 139.26 offering).

Example 3: Let's assume the issuer in Example 2 chooses instead to raise only $400,000 (Offering #2) using Rule 139.26 crowdfunding. If Offering #2 is well received and the issuer is now confident that it can raise an additional $5 million using SEC Rule 506(c) (Offering #3) from accredited investors, the issuer would have to wait until after six months have elapsed after Offering #2 concluded since the $1 million cap for Rule 139.26 offering is reduced by amounts raised in other securities offerings that are made within the six months before the Rule 139.26 offering, during the Rule 139.26 offering, and within six months after the Rule 139.26 offering is completed.

Example 4: The issuer in Example 3 also has the option of terminating Offering #2 before any investor monies are released from the escrow or segregated account. All money in the Rule 139.26 account would be returned to the prospective investors in full. The issuer could then immediately begin making public Offering #3 for $5 million using SEC Rule 506(c). In such a case, no proceeds would be raised from the Rule 139.26 offering so the $1 million cap and the six-month look back, during, and forward reductions contained in Rule 139.26 would be inapplicable.

Although an issuer in Example 4 could conduct an immediate public offering as Offering #3, it would not be able to conduct a private offering (like a SEC Rule 506(b) offering) or a limited public offering (like a Rule 139.16 or 139.19 offering) since those exemptions limit the manner of offering (a private offering) or limit the information an issuer can publicly disseminate about the offering. An issuer would have to have a cooling off period, after a terminated or failed public offering, before it could conduct a private or limited offering. Otherwise it could be concluded that the issuer could use the terminated public offering to raise interest (test the waters) for the private or limited offering. An issuer would also run the risk that the terminated public Rule 139.26 offering and the later private or limited offering would be considered integrated. If the offers were integrated, the issuer would lose the private or limited offering exemption because the issuer conducted activities (a public offering) inconsistent with claiming the private or limited offering exemption. Without an exemption for the offers and sales and having failed to register the securities, the issuer would have engaged in unregistered offers and sales of securities and would be subject to administrative, civil, and criminal action for the unlawful activity. A minimum period of six months would need to elapse between the public offering and private or limited offering to override this conclusion.

Waiting periods.

The issuer's filing with the Securities Commissioner must be received by the TSSB before the offering materials appear on the TCP's or dealer's Internet website. Rule 139.26(i).

An issuer's disclosure statement and offering summary must be made available online for 21 days before the issuer's securities can be sold. Rule 139.26(g)(3).

Amount that can be invested.

The dollar amount of securities that a purchaser can buy from an issuer is capped at $5,000 unless the purchaser is an accredited investor. There is no cap on the amount that an accredited investor can purchase. Rule 139.26(d).

Accredited investors.

Since accredited investors are not subject to the $5,000 cap on securities purchased, the issuer, TCP or general dealer operating the Internet website may wish to determine if a potential investor is an accredited investor. Before allowing an investor to exceed the $5,000 investment cap, the issuer must have a reasonable basis for believing that the purchaser is an accredited investor. Rule 139.26(d).

Accredited investor is defined in Rule 107.2, which references the definition that appears in SEC Rule 501.

Accredited investors are generally:

  • natural persons who fall within one of these categories:
    • a director, executive officer, or general partner of the issuer of the securities;
    • has an individual net worth, or joint net worth with that person's spouse, that exceeds $1,000,000. In calculating net worth, the person's primary residence is not included as an asset; or
    • has an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.
  • certain entities:
    • that have total assets in excess of $5,000,000; or
    • in which all of the equity owners are accredited investors.

Check the SEC website for updates and possible changes to the definition.

The Rule 139.26 exemption requires that the issuer have a reasonable basis for believing that the purchaser is an accredited investor. Rule 139.26(d). Since a TCP can only offer and sell securities pursuant to the Rule 139.26 exemption or Rule 139.25 exemption, the TCP must also establish that a prospective investor is accredited before permitting the investor to exceed the $5,000 cap. The issuer's responsibility to ascertain accredited status may be accomplished through a third-party provider, most likely the TCP or dealer. The issuer should investigate and understand the procedures used by a third party to determine if it is reasonable to rely upon the results provided by the third party. Whether conducting the accreditation check itself or relying upon a third party, the issuer must have a reasonable basis for believing that the check was accurate and thorough. Rule 139.26(d) and SEC Rule 147A(d).

One way to confirm accredited status is to have the prospective investor complete a detailed investor questionnaire prior to transferring any shares or finalizing the sale. The questionnaire should solicit information necessary to confirm the purchaser's status as an accredited investor. A purchaser can self-certify accredited status. This can be accomplished by having the prospective purchaser provide information that confirms the status, such as by identifying the accreditation category applicable to the purchaser. Simply asking a prospective purchaser if he or she is accredited and having the purchaser check “yes” or “no” would likely not be considered a reasonable step. It is prudent to have prospective purchasers that self-certify affirm that the information provided to confirm their status is true and accurate to the best of their knowledge. Another way to confirm accredited investor status includes relying on lists of accredited investors created and maintained by a reliable third party, such as a registered dealer.

Investor questionnaires and any other information or method used to confirm accredited investor status should be retained by the issuer, TCP or dealer.

Anyone can view offering materials.

Anyone, regardless of residency, can view securities-related offering materials on the website of the TCP in a Rule 139.26 / SEC Rule 147A offering. 

It is anticipated that, since the registered dealer or registered TCP must check a prospective purchaser's Texas residency before allowing the securities to be sold through its Internet website, that most issuers will work with the dealer or TCP to check residency or the issuer may delegate the verification process to the dealer or TCP. However, since the rule also requires the issuer to have a reasonable belief that an investor is a Texas resident, the  issuer should not permit the purchase of its securities if it has reason to believe that the purchaser is not a Texas resident or if it is not comfortable with the process utilized by the dealer or TCP. See Rule 139.26(d) and SEC Rule 147A(d).

Verifying Texas residency before a purchase can be made.

All investors must be Texas residents. An issuer must have a reasonable basis for believing that the purchaser of a security is a Texas resident. See Rule 139.26(d) and SEC Rule 147A(d). For purposes of determining the residence of purchasers:

  • A corporation, partnership, limited liability company, trust or other form of business organization is considered to be a resident of Texas if, at the time of sale to it, it has its principal place of business in Texas. SEC Rule 147A(d)(1).
  • An individual is considered to be a resident of Texas if the individual's principal residence is in Texas. SEC Rule 147A(d)(2).
  • If an entity was organized for the specific purpose of acquiring securities offered pursuant to this exemption, the entity is not considered to be a Texas resident unless all of its beneficial owners are Texas residents. SEC Rule 147A(d)(3).

Since the TCP or the general dealer would already be checking Texas residency, it is anticipated that the TCP or dealer will also verify Texas residency on behalf of the issuer. See Rule 115.19(b)(1)(C) and Rule 139.26(d). Whatever method used should be verifiable through an independent or governmental source. Obtaining a written representation from purchasers of Texas residency status will not, without more, be sufficient to establish a reasonable belief that such purchasers are Texas residents. SEC Rule 147A, Instruction to paragraph (d).

Escrow of funds.

Payments received from investors for the purchase of securities must be directed to and deposited in an escrow account with a bank or other depository institution located in Texas. The funds must be held in escrow until the amount raised from all purchasers is equal to or greater than the minimum target offering amount specified in the issuer's disclosure statement. If the offering is withdrawn or terminated by the issuer, TCP, or general dealer, or if the target amount of the offering is not raised by the time stated in the issuer's disclosure statement, all funds must be returned to the investors in full. See Rule 139.26(e)(1).

The escrow account needs to be in a federal or Texas-chartered bank or depository institution located in Texas. Rule 139.26(e)(4). An account at a Texas branch of a federal-charted bank or depository institution would meet this requirement. A depository institution is an entity with the power to accept deposits under applicable law and so could hold funds deposited into an escrow account. A trust company with the power to accept deposits under Texas law could be among the Texas-chartered entities permitted to hold funds in an escrow account. There is no requirement that the escrow account be interest bearing.

A segregated account may be used in lieu of an escrow account when the offering amount is $1 million or less. Rule 139.26(e)(2). When a segregated account is used, additional disclosures must be made to investors and other requirements apply.  See Rule 139.26(e)(6) and Rule 115.19(c)(3). Information specific to use of a segregated account to hold investor funds is provided in Use of a Segregated Account.

Obligations of parties to an escrow agreement, and liability that attaches for failing to meet any of those obligations, are governed by the terms of the escrow agreement and general contract law. The rule gives the parties the ability to set the terms of the escrow contract, including any indemnification agreement that they deem appropriate. Accordingly, liability arrangements should be addressed in the contract between the parties and in disclosures made in connection with the limitation on liability for small business issuances in Section 33.N of the Act.

The issuer, dealer, or TCP have flexibility to specify the method for an investor's payment into the escrow account and may limit payment methods if they so choose. The parties to the escrow agreement or contract could impose requirements or restrictions, such as requiring that all payments be made through the ACH (Automated Clearing House) network. Some TCPs or dealers may choose to permit purchasers to buy securities by using a credit card to make payments, rather than through money or funds transfer between financial institutions.

If the offering is terminated without being funded or closed, each investor receives back the full amount of his or her investment from the escrow account. Rule 139.26(e)(1). No deductions may be made from the investors' funds. Any fees collected by the escrow agent for maintaining the escrow account or issuing checks to investors must be paid by a party other than the investor. It is anticipated that the other party to the escrow agreement (whether the dealer, TCP, or the issuer) would pay any such fees charged by the escrow agent.

Issuer notice.

Outside of the communications channel on the general dealer or TCP’s Internet website, Rule 139.26 allows the issuer to distribute a limited notice. The content of the notice is limited to a statement that the issuer is conducting an offering, the name of the registered general dealer or TCP through which the offering is being conducted, and a link directing potential investors to the dealer or TCP’s Internet website. See Rule 139.26(f)(2).

Payment of commissions and other remuneration.

Generally, an issuer may not pay a commission or other remuneration for the offer or sale of its securities unless the person receiving the compensation is registered in Texas as a dealer, TCP, or agent of one of these registered entities. Securities of an issuer may not be listed on an Internet website of a general dealer or TCP that holds an interest in the issuer or that is affiliated with or under common control with the issuer. The issuer may not compensate a general dealer or a TCP by providing a financial interest in the issuer as compensation for services provided to or on behalf of the issuer. See Rule 139.26(j) and Rule 115.19(c)(4)-(6).

An exception from this prohibition is provided for a Section 44 Texas crowdfunding portal (S44TCP). An S44TCP is permitted to have a financial interest in an issuer that lists on the S44TCP's web portal. See Rule 139.26(j) and Rule 115.20(d).

Background and regulatory checks.

A TCP is required to conduct a reasonable investigation into the background and regulatory history of an issuer whose securities are offered on the TCP's website. This check includes the issuer's control persons. Rule 115.19(d) and Rule 115.20(e).

The TCP must deny an issuer access to its website if the TCP has a reasonable basis for believing that the issuer or any of its control persons are subject to a Rule 139.26 disqualification, if the issuer has engaged in, is engaging in, or the offering involves any act, practice, or course of business that will, directly or indirectly, operate as a fraud or deceit on any persons or it cannot adequately or effectively assess the risk of fraud by the issuer or its potential offering. Rule 115.19(d) and Rule 115.20(e).

These checks are conducted to help assure both investor protection and the health of the crowdfunding industry by aiding in fraud deterrence and detection.

Internet website requirements.

The Internet website operated by the TCP or general dealer that is used to offer the issuer's securities must meet certain requirements.

Communications channels.

The Internet website must provide communications channels that permit the issuer, prospective purchasers, and investors to communicate. All communications must occur on the Internet website and the communications must be visible to all persons with access to the securities offering materials on the website. See Rule 139.26(f)(1). Since all communications between the issuer and potential purchasers are required to be made through the Internet website, there could be no offers made except through the website operated by the TCP or general dealer. The exception to this is the issuer's notice permitted by Rule 139.26(f)(2).

One of the integral elements of crowdfunding is to have access to communications with others to tap into the “wisdom of the crowd.” No particular methodology is provided in the rule for how the communications channels should be structured so the TCP or dealer has flexibility in setting up this mechanism. The registered dealer or TCP is permitted to remove obscene, illegal, or irrelevant communications from the Internet website and has the option of removing or barring a user that makes such postings. All communications, including any removed from the website, must be archived and retained by the TCP or dealer as part of its recordkeeping responsibilities. See Rule 115.19(e) and Rule 115.20(f)(TCPs), and Rule 115.5 (dealers).

An issuer could supplement its information with a video on the TCP's or dealer's Internet website where the issuer's offering appears. Such a video would be included in the information required to be made available to the Commissioner and potential investors for a minimum of 21 days before any securities are sold in the offering. See Rule 139.26(g)(3). Since all communications between the issuer, prospective purchasers, or investors must occur through the Internet website of the registered general dealer or TCP, the video could not appear in another location where any prospective purchasers or investors could view it until after the Rule 139.26 offering has concluded.

Verification of Texas residency.

Although anyone can view securities-related offering materials on the website, the issuer must obtain an affirmative representation of Texas residency before a potential investor is permitted to invest in any of the offerings on the website. This is to assure that the intrastate character of the transaction is preserved and all purchasers will be Texas residents. See Rule 139.26(d) , SEC Rule 147A(d) and Rule 147A(f)(1)(iii).

Verification of residency may be accomplished by an affirmative representation by a potential investor that the investor is a Texas resident. Proof of at least one of the following would be considered sufficient evidence that the individual is a resident of Texas:

  • the Authorized User has a valid Texas drivers license or official personal identification card issued by the State of Texas;
  • the Authorized User has a current Texas voter registration; or
  • general property tax records show that the Authorized User owns and occupies property in this state as the Authorized User's principal residence (homestead exemption filed).

See Rule 115.19(b)(1)(C).

To provide flexibility, these are not the only methods that can be used to verify Texas residency. Whatever method used should be verifiable through an independent or governmental source or other auditable records. An affirmative representation by the Authorized User is not, in and of itself, sufficient to meet this verification requirement. A record of the method used to verify Texas residency is required to be maintained by the TCP or general dealer. See Rule 115.19(e)(2)(D) and Rule 115.20(f) (TCPs), and Rule 115.5 (dealers).

Since the issuer must also have a reasonable belief about any Authorized User's or Verified Purchaser's Texas residency and, if applicable, accredited investor status, if the issuer is relying on another for the residency and accreditation checks, the issuer must be familiar with the processes used by the third party and comfortable that they would meet the issuer's obligations. Rule 139.26(d).

Issuer information on the Internet website.

Information about the issuer and the offering is available on the TCP or general dealer's Internet website. This information consists of the issuer's disclosure statement and a summary of the issuer's offering. The disclosure statement and summary must be made available on the Internet website for a minimum of 21 days before any securities can be sold in the offering. See Rule 139.26(g)(2)-(3).

A sale is considered to have occurred if the prospective purchaser enters into a binding agreement to purchase the securities. However, an issuer could, through the website, accept nonbinding solicitations of interest prior to the expiration of the 21-day posting requirement and grant those interested persons priority when the securities can legally be sold.

The summary of the offering and disclosure statement appearing on the website are among the documents that must be filed with the Securities Commissioner before the offering can appear on the Internet website. Rule 139.26(i).

Summary of the offering.

A summary of the offering includes:

  • a description of the issuer - type of entity, its form of business, principal office, history, business plan, and the intended use of the offering proceeds, including compensation paid to any owner, executive officer, director, or manager;
  • the identity of the executive officers, directors, and managers, including their titles and their prior experience and the identity of all persons owning more than 20% of the ownership interests of any class of securities of the company; and
  • a description of the securities being offered and of any outstanding securities of the company, the amount of the offering, and the percentage ownership of the company represented by the offered securities.

See Rule 139.26(g)(2)(B).

Disclosure statement - availability.

The issuer's disclosure statement must be made readily available and accessible to each prospective purchaser when the offer of securities is made on the Internet website. See Rule 139.26(h).

Disclosure statement - content.

An issuer's disclosure statement contains all information material to the offering, risk factors, and financial information. Included in the disclosures should be a discussion of significant factors that make the offering speculative or risky.

Among the topics to be addressed in the disclosure document are:

  • a general description of the issuer's business;
  • the history of the issuer's operations and organization;
  • the management of the company and principal stockholders;
  • how the proceeds from the offering will be used;
  • financial information about the issuer;
  • a description of the securities being offered; and
  • any litigation and legal proceedings.

See Rule 139.26(h)(1).

More detailed guidance on the categories of information to include can be found on this website. 

Disclosure statement - financial information.

An issuer must provide current financial statements certified by its principal executive officer to be true and complete in all material respects. If the issuer has audited or reviewed financial statements prepared within the last three years, those financial statements must be provided to investors as well. See Rule 139.26(h)(3).

Disclosure statement - mandatory disclosures.

The issuer must inform all prospective purchasers and investors of the following:

  • There is no ready market for the sale of the securities acquired from this offering; it may be difficult or impossible for an investor to sell or otherwise dispose of this investment. An investor may be required to hold and bear the financial risks of this investment indefinitely.
  • The securities have not been registered under federal or state securities laws and, therefore, cannot be resold unless the securities are registered or qualify for an exemption from registration under federal and state law.
  • In making an investment decision, investors must rely on their own examination of the issuer and the terms of the offering, including the merits and risks involved.
  • No federal or state securities commission or regulatory authority has confirmed the accuracy or determined the adequacy of the disclosure statement or any other information on this Internet website.

See Rule 139.26(h)(2), Rule 115.19(b)(3), and Rule 115.20(c).

Since the exemption requires that the securities be in compliance with SEC Rule 147A, the issuer must also provide written disclosures concerning the limitations on resale of the securities contained in SEC Rule 147A(e) and (f). Additionally, an issuer must place a required legend on the securities certificate or other document evidencing the securities issued in the offering.

Limitation on liability.

Section 33.N of the Texas Securities Act contains a provision that may limit liability in certain small business offerings. If the limitation applies, the maximum amount that may be recovered against a person to which the limitation applies in a civil action brought under Section 33 of the Texas Securities Act is three times the fee paid by the issuer to the person for the services related to the offer of securities. The limitation does not apply if the trier of fact finds the person engaged in intentional wrongdoing in providing the services.

To invoke the liability limitation, the small business issuer offering the securities must provide a written disclosure of the limitation of liability created by Section 33.N  to the prospective purchaser and have received a signed acknowledgment that the disclosure was provided.

See Texas Securities Act, Section 33.

The issuer could choose to provide the notification through the TCP or dealer, which could provide a mechanism to receive signed acknowledgments from purchasers of the securities.

Limitations on resale of the securities.

Since Rule 139.26(a) requires that the securities be issued in an offering that complies with SEC Rule 147A, the disclosure required by Rule 147A must also be made. See SEC Rule 147A(e) and (f). The limitations on resale contained in SEC Rule 147A(f) include the following:

  • Placing a legend on the certificate or other document evidencing the security stating that the securities have not been registered and that any resale of the securities for a period of six months after the date of the last sale by the issuer in the offering, can only be made to Texas residents.
  • Issuing stop transfer instructions to the issuer's transfer agent, if any, with respect to the securities, or, if the issuer transfers its own securities make a notation in the appropriate records of the issuer.
  • Obtaining a written representation from each purchaser as to his or her residence.

Limitation on liability.

Section 33.N of the Texas Securities Act contains a provision that may limit liability in certain small business offerings. If the limitation applies, the maximum amount that may be recovered against a person to which the limitation applies in a civil action brought under Section 33 of the Texas Securities Act is three times the fee paid by the issuer to the person for services related to the offer of securities. The limitation does not apply if a trier of fact finds the person engaged in intentional wrongdoing in providing the services.

A “small business issuer” is an issuer of securities that, at the time of an offer to which the limitation applies:

  • has annual gross revenues in an amount that does not exceed $25 million; and
  • does not have equity securities registered, or required to be registered, with the SEC.

The limitation applies to:

  • offers and sales of a small business issuer's securities that, in an aggregate amount, do not exceed $5 million; and
  • a person (including an attorney, accountant, consultant, or the firm of the attorney, accountant, or consultant) who has been engaged to provide services relating to such offers and sales of securities.

To invoke the liability limitation, the small business issuer offering the securities must provide a written disclosure of the limitation of liability created by Section 33.N to the prospective purchaser and have received a signed acknowledgment that the disclosure was provided.

Penalties for noncompliance.

If an issuer fails to comply with the terms of the Rule 139.26 exemption from securities registration, the issuer and those assisting the issuer in the offer and sale of the unregistered securities are subject to criminal, civil, and/or administrative action. A securities dealer (including a TCP) involved in an unregistered offering may also be liable for assisting or offering securities when there is no exemption for the offer and sale of those securities. This includes criminal, civil, and administrative liability. Section 37 of the Texas Securities Act places the burden of proof on a person claiming an exemption to prove up the availability of the exemption.

Persons engaging in, or assisting another to engage in, the offer or sale of a security by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, are subject to criminal, civil, and/or administrative action.

If the out-of-state sales also result in the loss of a federal intrastate exemption from securities or dealer registration, additional remedies and liability exist under federal law.

More information on the criminal, civil, and administrative penalties available to address unregistered or fraudulent activities under the Texas Securities Act can be found by reviewing Sections 14, 23, 23-1, 23-2, 29, and 33.