A preorganization certificate is a written commitment among founders or early investors to fund and support a business entity before that entity has been legally formed with any state. It records who will contribute what, who plays which role, and how ownership will be split once the corporation or LLC actually exists. The catch that surprises most founders: federal securities law treats a preorganization certificate as a security, so issuing one can trigger the same registration and disclosure rules that apply to selling stock in a public company.
What the Document Actually Contains
Because the business does not yet exist, the certificate is an internal agreement rather than a government filing. Promoters or founders draft it during the earliest planning stages of a new corporation, LLC, or similar entity. It generally records:
- The names of the founders and what each is responsible for before and after formation.
- The proposed business name and the kind of business the entity will conduct.
- How much money or property each founder or early investor agrees to put in, and how ownership will be divided in return.
- Who pays the bills that accumulate before the entity can legally hold a bank account or sign contracts in its own name.
A close cousin is the preorganization subscription, which is specifically an agreement to purchase shares or membership interests in the future entity. The two documents often travel together and serve the same purpose: locking in financial commitments before the business is formally organized.
Why It Counts as a Security
Section 2(a)(1) of the Securities Act of 1933 lists “preorganization certificate or subscription” among the instruments that qualify as a security under federal law.1Office of the Law Revision Counsel. 15 U.S. Code 77b – Definitions; Promotion of Efficiency, Competition, and Capital Formation Section 5 then makes it illegal to offer or sell a security through interstate commerce or the mail without a registration statement in effect.2Office of the Law Revision Counsel. 15 U.S. Code 77e – Prohibitions Relating to Interstate Commerce and the Mails
Handing a preorganization certificate to an investor and asking them to commit money is therefore an offer of an unregistered security. The fact that the company does not exist yet is not a loophole. It is exactly the situation the statute was written to cover.
Exemptions Founders Typically Use
Full SEC registration rarely makes sense for a business that has not filed articles of incorporation. Founders usually rely on an exemption instead.
Section 4(a)(2) of the Securities Act exempts “transactions by an issuer not involving any public offering.”3Office of the Law Revision Counsel. 15 U.S. Code 77d – Exempted Transactions If a certificate goes only to a small group of co-founders actively involved in planning the business, this exemption is generally the one at work. The SEC has also built out more specific safe harbors under Regulation D:
- Rule 504 allows offers and sales of up to $10 million in securities within a 12-month period. The issuer must file a Form D notice with the SEC within 15 days of the first sale and comply with state securities laws.4U.S. Securities and Exchange Commission. Exemption for Limited Offerings Not Exceeding $10 Million – Rule 504 of Regulation D
- Rule 506(b) has no dollar cap, but the issuer cannot use general solicitation or advertising and can sell to no more than 35 non-accredited investors in any 90-day period.5eCFR. Regulation D – Rules Governing the Limited Offer and Sale of Securities
- Rule 506(c) also has no dollar cap and permits general solicitation, but every purchaser must be an accredited investor and the issuer must take reasonable steps to verify that status.5eCFR. Regulation D – Rules Governing the Limited Offer and Sale of Securities
State securities laws, often called blue sky laws, still apply even under a federal exemption. Check the rules in every state where you offer or sell the certificate.
State Rules on Preincorporation Subscriptions
Many states follow provisions modeled on Section 6.20 of the Revised Model Business Corporation Act, which adds a specific layer of rules for share subscriptions signed before incorporation. Under those provisions, a preincorporation subscription is irrevocable for six months, unless the agreement sets a different period or all subscribers agree to revoke it. Once the corporation exists, the board of directors sets payment terms if the agreement does not, and any call for payment must be uniform across all shares of the same class.
If a subscriber defaults, the corporation can collect the amount owed like any other debt or, if the agreement does not say otherwise, rescind and sell the shares after giving 20 days’ written notice. The six-month window gives founders confidence that early commitments will hold while giving subscribers a defined exit if the venture never launches.
Personal Liability of the Promoters
This is where founders most often get hurt. Signing a contract on behalf of a corporation that does not yet exist makes you personally liable on that contract. Describing yourself as acting “on behalf of” the future entity does not change the result. The entity has no legal existence, so it cannot be a party, and the obligation lands on you.
Forming the corporation later and having it adopt or ratify the contract does not automatically release the promoter. After ratification, both the promoter and the newly formed corporation are liable. The promoter stays on the hook unless the other party agrees to a novation, which substitutes the corporation for the promoter in a new agreement. When multiple promoters sign, their liability is joint and several, so any one of them can be pursued for the full amount.
A carefully drafted preorganization certificate helps manage that exposure. It can name which founders are authorized to enter contracts, set spending limits before incorporation, and require that pre-incorporation contracts contain language contemplating novation once the entity is formed. That does not eliminate the risk, but it clarifies who is exposed and for how much.
What Happens Once the Entity Is Formed
A preorganization certificate does not create a legal entity. The business comes into existence only when formation documents are filed with and accepted by the appropriate state authority: articles of incorporation for a corporation, articles or a certificate of organization for an LLC.
After the state accepts the filing, the entity can open bank accounts in its own name, sign contracts as a legal person, and begin adopting or ratifying the agreements the promoters made on its behalf. The certificate itself then becomes a historical record. Its commitments get absorbed into bylaws, shareholder agreements, or the operating agreement, or they lapse if the entity is never formed. Treat the certificate as a bridge to formation, not a substitute for it, and follow through on the securities filings, the state formation paperwork, and the novations needed to lift personal liability off the founders.