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RULE §109.7Secondary Trading Exemption under the Texas Securities Act, §5.O

(a) When a withdrawal of an application for registration of securities is allowed and thereafter the applicant files for a secondary trading exemption under the Act, §5.O, the Commissioner may, without a hearing, revoke or suspend the §5.O exemption. The applicant may either accept such action of the Commissioner or request a hearing under the Act, §24.

(b) The language, ". . . at prices reasonably related to the current market price of such securities at the time of such sale," means that the market price of the security in the existing secondary market must have a basis supported by a substantial volume of bona fide sales transactions within or without this state. In the absence of a going market or where there have been only casual transactions, it shall be incumbent on the person filing the §5.O exemption notice to prove to the Commissioner that the securities will have a market price which has been fairly determined and justified at inception with reasonable assurance of continuity of the market into the future, pursuant to which the following criteria will be considered:

  (1) the nature and extent of the business operations of the issuer and its predecessor, if any, and the period of time during which the issuer and its predecessor, if any, has been continuously engaged in business;

  (2) the net asset value of the stock per share;

  (3) if there is a record of earnings for the issuer, the value per share of the stock based upon a reasonable times-earnings factor (setting out the factor used) related to the industry represented by the issuer;

  (4) if the value per share of the stock on any other basis has been fully justified;

  (5) if the issuer undertakes to furnish to its shareholders and dealers deemed likely to trade the securities of the issuer, financial statements for the three most recent fiscal years ending as of the balance sheet date (or for the period of existence if less than three years) and annual financial statements thereafter for so long as the exemption is maintained by filing statements with the Commissioner;

  (6) whether a registered Texas securities dealer who is financially able has made a written undertaking setting out:

    (A) his willingness to make a market in the issue of securities;

    (B) the price at which he will begin the market; and

    (C) the procedures which he intends to follow for the purpose of assuring an orderly market; and

  (7) supplementary data to assist in determining the character of the share distribution and the number of publicly-held shares shall be as follows:

    (A) identification of 10 largest holders of record, including beneficial owners (if known) of holdings of record by nominees;

    (B) list of holdings of 1,000 shares or more in the names of registered dealers and unregistered out-of-state dealers;

    (C) number of transfers and shares transferred during the last two years (or period of existence of the issuer, if shorter);

    (D) summary, by principal groups, of stock owned or controlled by:

      (i) officers or directors and their immediate families; or

      (ii) other concentrated holdings of 10% or more;

    (E) estimates of number of nonofficer employees owning stock and the total shares held;

    (F) company shares held in profit-sharing, savings, pension, or other similar funds or trusts established for the benefit of officers or employees; and

    (G) number of round-lot and number of odd-lot holders of record and aggregate numbers of shares so held.

(c) Sales of securities pursuant to the Securities Act, §5.O, may be made by or through securities dealers acting either as principal or agent in the transaction for which the exemption is claimed.

(d) Financial information required pursuant to the Act, §5.O(9)(b) and (c) must be prepared as certified financial statements (consolidated, if applicable) and shall include a balance sheet as of a date within 18 months of the date of such sale and the related statements of income, changes in stockholders' equity, and changes in financial position for the three most recent fiscal years ending as of the balance sheet date, or for the period of the issuer's existence, if less than three years. Such financial statements should disclose dividends paid or declared by each class of stock, for each period for which an income statement is presented.

(e) The term "recognized securities manual" as used in the Texas Securities Act, §5.O(9)(c), is limited to Best Insurance Reports Life-Health, any Mergent's Manual, and the OTC Markets Group Inc. website (www.otcmarkets.com) for a company that is currently or has recently been quoted on the OTCQX or OTCQB markets. This designation encompasses both print and electronic data and includes periodic supplements to these publications. The information provided in the recognized securities manual must contain the information specified in subsection (d) of this section. All information provided must be current. The time for determining whether the entries are current is at the date of the particular sale, not the date the manual listings are published. If a listing is not continually updated, the exemption would not be available once the published balance sheet becomes more than 18 months old.

(f) The secondary trading exemption under the Act, §5.O, is not available for the securities of an issuer formed in a manner that constitutes part of a scheme to violate or evade the securities registration provisions of the Act. Depending upon all the facts and circumstances, such a scheme may include the merger of a private corporation with a corporation which has no substantive operations or assets ("shell corporation") when as a result of the merger trading in the secondary market of the shares of the post-merger corporation may be at prices which bear no relationship to the underlying financial condition or operations of the post-merger corporation, and such trading may occur within two years of the date of such merger.

Source Note: The provisions of this §109.7 adopted to be effective January 1, 1976; amended to be effective May 11, 1979, 4 TexReg 1543; amended to be effective September 6, 1979, 4 TexReg 3015; amended to be effective December 30, 1983, 8 TexReg 5276; amended to be effective February 15, 1989, 14 TexReg 693; amended to be effective November 29, 1989, 14 TexReg 6076; amended to be effective December 3, 2000, 25 TexReg 11645; amended to be effective June 19, 2013, 38 TexReg 3779; amended to be effective February 26, 2017, 42 TexReg 673; amended to be effective June 17, 2020, 45 TexReg 4001

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