Preorganization Certificate

Before Callowmere Instruments Inc. is incorporated, its promoter obtains written subscriptions from twelve prospective investors, each binding the subscriber to buy shares once the company is formed. No money changes hands yet and the corporation does not yet exist. Under the Uniform Securities Act, a preorganisation subscription of this kind is:

1. A.A security, because the definition expressly includes a preorganisation certificate or subscription.Correct. It is named in the statutory definition.
2. B.Not a security, because no consideration has yet been paid.Incorrect. Payment is not required for the instrument to be a security.
3. C.A security only after the corporation is formed and the shares are issued.Incorrect. The subscription is itself a security from the outset.
4. D.Not a security, because no corporation yet exists to issue anything.Incorrect. The definition anticipates exactly this pre-incorporation stage.

Why: The statutory definition of a security expressly lists a preorganisation certificate or subscription. It is a security from the moment it is offered, which is why the Act separately provides a narrow transaction exemption for preorganisation subscriptions rather than treating them as outside its reach.

A State F compliance officer sorts four items into two boxes: exempt securities and exempt transactions. The items are (1) a bond issued by the United States Treasury, (2) a sale of unregistered stock by an issuer to a commercial bank, (3) a preorganisation subscription meeting all statutory conditions, and (4) a bond issued by a hospital organised exclusively for charitable purposes. Under the Uniform Securities Act, the EXEMPT TRANSACTIONS are:

1. A.Items 3 and 4.Incorrect. The charitable hospital bond is an exempt security, not an exempt transaction.
2. B.Items 1 and 4.Incorrect. Those two are exempt securities, defined by the instrument and its issuer.
3. C.Items 1 and 2.Incorrect. The Treasury bond is an exempt security, not an exempt transaction.
4. D.Items 2 and 3.Correct. A sale to an institutional buyer and a qualifying preorganisation subscription are exempt transactions.

Why: Items 1 and 4 describe the character of the instrument and its issuer, so they are exempt securities. Items 2 and 3 describe the circumstances of a particular trade, namely a sale to an institutional buyer and a qualifying preorganisation subscription, so they are exempt transactions.

Before Wrenfell Locomotive Works is incorporated, promoter Adela Fennimore obtains signed preorganisation subscriptions from nine prospective shareholders in State A. She pays no one anything for finding them, and she collects no money from the subscribers, who will pay only after the corporation exists. She makes no other offers. Under the Uniform Securities Act, the subscriptions are:

1. A.Not exempt, because the exemption requires each subscriber to pay at least a nominal deposit.Incorrect. The exemption requires that NO payment be made by any subscriber.
2. B.Exempt only if the number of subscribers does not exceed twenty-five.Incorrect. The limit is ten subscribers.
3. C.Not exempt, because a preorganisation subscription is a security and no corporation yet exists to register it.Incorrect. The instrument is a security, which is why an exemption is needed and available.
4. D.Exempt, because no commission was paid, there are no more than ten subscribers, and no subscriber paid anything.Correct. All three conditions of the preorganisation subscription exemption are satisfied.

Why: The preorganisation certificate or subscription exemption is available where no commission or other remuneration is paid for soliciting any prospective subscriber, the number of subscribers does not exceed ten, and no payment is made by any subscriber. All three conditions hold here, so the transaction is exempt and no registration is required.

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.