Securities Sales by Affiliates under Texas Securities Act

Let's say you are an officer or director of a privately held company in Texas.  Can you sell shares of the Company to another officer or director without registering the sale or otherwise making a filing with the Texas State Securities Board?  Probably so, but the answer is not nearly as obvious as you might think. 

As a reminder, all sales of securities must be registered or exempt from registration.  Even if a sale is exempt from registration under federal securities laws, one must also register or find an exemption from registration under applicable state securities laws, such as the Texas Securities Act.

The Texas Securities Act provides a number of exemptions from registration, but most of the exemptions are not available for affiliates (such as officers and directors) of privately held companies.  Let's walk through some of them. 

Most of the exemptions are available only to the issuer of the securities, so those won't help you. Rule 139.13 provides an exemption for sales of securities that comply with the SEC's Rule 144, but affiliates of the issuer cannot rely on Rule 144 unless "current public information" regarding the issuer of the securities is available - that's virtually never the case for a privately held company.  Rule 139.14 provides an exemption for a limited number of sales of securities by non-issuers, but affiliates of the issuer who wish to rely on this exemption must file a Form 133.34 with the Texas State Securities Board.

Fortunately, we have Section 5.C(1) of the Texas Securities Act, which exempts "[s]ales of securities made by or in behalf of a vendor, whether by dealer or other agent, in the ordinary course of bona fide personal investment of the personal holdings of such vendor, or change in such investment, if such vendor is not engaged in the business of selling securities and the sale or sales are isolated transactions not made in the course of repeated and successive 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;"

The Texas Securities Board has issued several opinions interpreting Section 5.C(1).  Basically, a "vendor" under Section 5.C(1) appears to mean anyone who sells securities held for personal investment.  Unfortunately, the statutory language quoted above is simply not very clear.