Limited Offering Exemption

Over eleven months Kelverdon Instruments directs offers of its unregistered stock in State K to nine individual residents and to six insurance companies authorised to do business there. Seven of the individuals and four of the insurers buy, each representing in writing that it is purchasing for investment. No commission or other remuneration is paid to anyone for soliciting any prospective buyer in State K. Under the Uniform Securities Act, the offering:

1. A.fails the exemption, because offers were directed to fifteen persons in twelve monthsThe institutional offerees are excluded from the count, leaving nine.
2. B.qualifies, because only eleven persons actually purchased and the limit applies to purchasersThe limit is on offerees, not purchasers. The right answer depends on excluding institutions from the offeree count.
3. C.qualifies for the limited offering exemption, because institutional offerees are not counted and only nine countable persons were offered the stockCorrect. Institutional offerees are excluded from the ten person count and both statutory conditions are met.
4. D.fails the exemption, because an issuer may never rely on a limited offering exemption for unregistered stockIssuers are the ordinary users of the limited offering exemption.

Why: The limited offering exemption covers a transaction pursuant to an offer directed to not more than ten persons in the state during twelve consecutive months, excluding from that count the institutional buyers who have their own exemption. The six insurance companies are institutional and are not counted, leaving nine countable offerees. The seller reasonably believes the buyers are purchasing for investment and no commission was paid for soliciting, so both conditions are satisfied and the exemption is available.

Before Larchmere Robotics is incorporated, its promoters solicit share subscriptions from a small circle of prospective founders. For the offering to fit the PREORGANIZATION CERTIFICATE (subscription) exemption under the Uniform Securities Act, it must satisfy which set of conditions?

1. A.Subscribers must pay in full at the time of subscription so that the corporation is capitalized at formationPayment by a subscriber defeats the exemption. No money may change hands.
2. B.The promoters must file a registration statement by qualification and pay the state filing feeThe whole point of an exemption is that no registration statement is required.
3. C.No commission or other remuneration may be paid for soliciting any prospective subscriber, the subscribers may not exceed ten, and no payment may be made by any subscriberCorrect. All three conditions must be satisfied for the exemption to apply.
4. D.The subscribers may not exceed 35 and each must be an accredited investorThose numbers come from federal private placement concepts and are not the preorganization test.

Why: The preorganization certificate exemption has three simple conditions, all of which must be met: no commission or other remuneration may be paid, directly or indirectly, for soliciting any prospective subscriber; the number of subscribers may not exceed ten; and no payment may be made by any subscriber. The last condition is the surprising one, and it is what keeps the exemption narrow: subscribers commit to buy but hand over no money before the corporation exists.

Between February and November, Corvenwold Ceramics directs offers of its unregistered stock to ten individual State T residents, none institutional, and seven of them buy. In December, still inside the same twelve month period, an enthusiastic director sends the offering materials to one more individual, who declines to invest. No commissions are paid and every buyer purchases for investment. Under the Uniform Securities Act, the most accurate statement is:

1. A.The exemption is lost for the twelve month period, because the eleventh offeree breaks an offeree based limit even though he did not buyCorrect. The limit counts persons to whom the offer is directed, so a non-purchaser still counts.
2. B.The exemption stands, because only seven people actually purchased and the limit applies to purchasersThe statutory limit is expressed in offerees, not purchasers.
3. C.Only the December contact is outside the exemption, and the seven completed sales are unaffectedThe condition is measured across the twelve month period, so breaking it undermines the exemption for the offering as a whole.
4. D.The exemption stands, because no commission was paid and every buyer purchased for investmentThose two conditions are necessary but not sufficient. The offeree limit is a separate condition and it failed.

Why: The limited offering exemption is conditioned on the offer being directed to not more than ten non-institutional persons in the state during any period of twelve consecutive months. The eleventh offeree breaks the condition for that twelve month period even though he bought nothing, because the limit counts offerees rather than purchasers. The earlier sales were made pursuant to an offering that no longer satisfies the exemption, so those purchasers acquired unregistered non-exempt securities and hold the remedies the Act gives them.