The Texas Securities Act: Claims by Investors and Defenses

Where the Act lives now

The Texas Securities Act was moved, without substantive change, from article 581 of the civil statutes into Title 12 of the Texas Government Code, chapters 4001 through 4008, effective January 1, 2022. Chapter 4001 holds the definitions, chapter 4003 the registration of securities, chapter 4004 the registration of dealers, agents and investment advisers, chapter 4005 the exemptions, and chapter 4008 the private rights of action. Older cases and articles cite "article 581-33"; that is the same civil-liability section that is now sections 4008.051 through 4008.062.

The Act reaches further than many sellers expect. A "security" under section 4001.068 includes stock, notes and other evidence of indebtedness, limited partnership interests, interests under oil, gas or mining leases, investment contracts and any instrument commonly known as a security. A founder selling shares in a start-up, a sponsor selling units in a real estate deal and a promoter selling a working interest are all "sellers" for this purpose. Whether a particular deal is a security at all is covered in the guide on unregistered securities and rescission.

Claim one: sale by means of an untrue statement or omission

Section 4008.052 is the center of most investor cases. A person who offers or sells a security by means of an untrue statement of a material fact, or an omission of a material fact needed to make what was said not misleading, is liable to the buyer. Three features make it stronger for investors than common-law fraud:

• No scienter. The buyer does not have to prove the seller knew the statement was false or acted recklessly. Negligent misstatements count.
• Burden shifts to the seller. The seller avoids liability only by proving that the buyer knew of the untruth or omission, or that the seller did not know and in the exercise of reasonable care could not have known of it.
• Privity, but broad privity. The claim runs against the person from whom the buyer bought, and section 4008.055 extends it to anyone who controlled that seller and to anyone who materially aided the sale with intent to deceive or with reckless disregard. Secondary liability has its own guide.

Section 4008.054 adds a parallel claim against an issuer that registered securities and whose required prospectus was false as of its effective date, even if the issuer was not the direct seller.

Claim two: sale in violation of the registration rules

Section 4008.051 makes a seller liable to the buyer for selling a security that was not registered or exempt, for selling while the dealer or agent was not registered as required by chapter 4004, or for selling in violation of a Securities Commissioner's cease-and-desist order. No misstatement is needed. The buyer simply shows the sale, the lack of a permit or registration, and the absence of an exemption. Many private deals rely on exemptions, including the federal Rule 506 exemption that Texas must honor, so the fight is usually over whether the exemption's conditions were actually met.

What the buyer recovers

The Act fixes the measure. Under section 4008.056, a buyer who still holds the security tenders it back and recovers the consideration paid plus interest at the legal rate from the date of payment, less any income received on the security. Under section 4008.057, a buyer who no longer holds it recovers the consideration paid plus interest, minus the greater of the value at disposition or the amount actually received, in each case plus income received. Tender may be made any time before judgment.

Section 4008.060 adds costs as of right and reasonable attorney's fees if the court finds a fee award equitable under the circumstances. There are no exemplary damages under the Act itself; a buyer who wants those must plead common-law fraud or statutory fraud under Texas Business and Commerce Code section 27.01 alongside it.

Example

Suppose a Dallas dentist buys $150,000 of membership units in a car-wash venture after the promoter's deck states that the first two locations are "cash-flow positive." They were not; the promoter had misread a bookkeeper's report. Under common-law fraud the dentist would have to prove the promoter knew or was reckless. Under section 4008.052 she does not. She tenders the units and recovers the $150,000 with legal interest, less any distributions she received, unless the promoter can prove he could not have learned the truth with reasonable care. If the units were also sold through a commissioned salesman who was never registered as a dealer or agent in Texas, she adds a registration claim under section 4008.051, which needs no misstatement at all.

The seller's defenses

The rescission offer deserves attention from both sides. A company that discovers a problem in its own offering can make a compliant offer to every buyer and, for those who accept or fail to reject properly, end the exposure. A buyer who receives one has 30 days to reject in writing and expressly reserve the right to sue, and then one year to file.

Deadlines

Section 4008.062 sets them. Registration claims under section 4008.051 must be brought within three years after the sale. Misstatement claims under sections 4008.052 and 4008.054 must be brought within three years after the buyer discovered, or with reasonable diligence should have discovered, the untruth or omission, and in no event more than five years after the sale. After a compliant rescission offer is rejected, the buyer has one year from the rejection. These periods are separate from the federal deadlines, which are compared in the guide on securities deadlines.

Where the case is heard

Texas Securities Act claims are state-law claims and are usually filed in a Texas district court; in Dallas that means the Dallas County civil district courts, or the Texas Business Court if the dispute qualifies. If the same facts also support a federal Rule 10b-5 claim, the whole case can be brought in federal court, which hears the Texas claim alongside the federal one. If the buyer bought through a brokerage firm, the account agreement and FINRA rules may send everything to arbitration instead. A litigator weighs those choices before filing, because they change discovery, timing and who decides the facts.

When to involve a litigator

For a buyer, as soon as a misstatement or a registration gap is suspected, because the three-year discovery clock may already be running. For a company or seller, as soon as a complaint or a demand arrives, because a well-drafted rescission offer can be the cheapest exit available and the window to make one effective is narrow. Tina Wysk represents investors, companies and their principals in Texas Securities Act cases in Dallas state and federal courts; her securities and investment practice covers both sides.