A group of eight prospective incorporators wants to solicit preorganization subscriptions for a company that has not yet been formed. Which condition must be satisfied for the preorganization certificate/subscription exemption to apply?

No subscriber may pay any consideration for the subscription before the exemption's conditions are met, no commission may be paid for soliciting subscribers, and the number of subscribers may not exceed the statutory cap

Which of the following insurance-related products is treated as a security subject to registration (absent another exemption) rather than as an exempt insurance product under the Uniform Securities Act?

A variable annuity contract, where returns depend on an underlying separate investment account

A promoter sells ownership units in a managed avocado orchard. Investors contribute cash, have no role in day-to-day farming decisions, and are told profits will come solely from the promoter's management expertise and the pooled harvest sales. Under the Howey analysis typically used to define 'investment contract,' this arrangement is:

A security, because it involves an investment of money in a common enterprise with profits expected solely from the efforts of others

A promissory note qualifies for an exemption from registration under the Uniform Securities Act. If the issuer makes materially false statements in selling the note, the antifraud provisions of the Act:

Apply fully, because exemptions from registration never exempt a transaction from the antifraud provisions

A registered broker-dealer's trading desk receives an unprompted call from an existing brokerage customer who, entirely on his own initiative, asks to buy shares of a thinly-traded company in the secondary market. No agent recommended or solicited the trade. This nonissuer transaction is most likely treated as:

An exempt unsolicited brokerage transaction

A state Administrator receives credible complaints that a firm registered with the SEC as an investment adviser has misrepresented its fees to clients in the state. The firm argues NSMIA leaves the state without authority. Which is correct?

NSMIA preserves the state's authority to investigate and bring enforcement actions for fraud or deceit against federal covered advisers.

Series 63 Antifraud Provisions Practice Questions

Official outline: NASAA Series 63 Exam Content Outline
Questions on this page: 6
Updated: Nov 3, 2026

Question 1, medium
A group of eight prospective incorporators wants to solicit preorganization subscriptions for a company that has not yet been formed. Which condition must be satisfied for the preorganization certificate/subscription exemption to apply?
- A.Subscribers may deposit payment with an escrow agent before formation, commissions may be paid to registered agents who solicit them, and the number of subscribers may not exceed the statutory cap
- B.No subscriber may pay any consideration for the subscription before the exemption's conditions are met, no commission may be paid for soliciting subscribers, and the number of subscribers may not exceed the statutory cap
- C.The incorporators must file a notice and fee with the Administrator before soliciting, subscribers may be limited to state residents, and commissions to agents are permitted if disclosed
- D.Each subscriber must be an accredited investor, no commission may be paid for soliciting subscribers, and the number of subscribers may not exceed the statutory cap
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Correct answer: B. No subscriber may pay any consideration for the subscription before the exemption's conditions are met, no commission may be paid for soliciting subscribers, and the number of subscribers may not exceed the statutory cap
The preorganization certificate/subscription exemption requires: no payment by any subscriber, no commission paid for soliciting subscriptions, and no more than a set number of subscribers (traditionally 10). All three conditions must hold together. This exemption is designed for the very earliest, purely inchoate stage before any money changes hands.
- A. Wrong because the exemption bars any payment by subscribers before the conditions are met, and an escrow deposit is still a payment. It also bars commissions or other remuneration for soliciting subscribers, even to registered agents.
- B. Correct. The preorganization exemption requires that no subscriber pay consideration before the conditions are met, no commission be paid for soliciting subscribers, and the number of subscribers stay within the statutory cap.
- C. Wrong because the exemption is self-executing and requires no notice filing or fee with the Administrator. Residency is not a condition, and commissions for soliciting subscribers are prohibited, not allowed with disclosure.
- D. Wrong because the exemption has no accredited-investor requirement for subscribers. Its actual conditions are no payment by subscribers, no commission for solicitation, and a limit on the number of subscribers.
- Source: Exam outline: NASAA Series 63 Exam Content Outline, accessed October 2026
Question 2, medium
Which of the following insurance-related products is treated as a security subject to registration (absent another exemption) rather than as an exempt insurance product under the Uniform Securities Act?
- A.A fixed whole life insurance policy with guaranteed cash values and a fixed death benefit set by the insurer
- B.A fixed annuity contract with a guaranteed payout backed by the insurer's general account
- C.A variable annuity contract, where returns depend on an underlying separate investment account
- D.A traditional fixed-rate deferred annuity with a guaranteed minimum interest rate declared by the insurer
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Correct answer: C. A variable annuity contract, where returns depend on an underlying separate investment account
Fixed insurance and annuity products transfer investment risk to the insurer and are excluded from the definition of security. Variable annuities and variable life products shift investment risk to the policyholder through an underlying separate account and are treated as securities requiring registration (and typically require the seller to be securities-licensed as well as insurance-licensed).
- A. Fixed whole life insurance has guaranteed values set by the insurer and isn't tied to a separate investment account, so it falls under the insurance exemption, not securities registration.
- B. A fixed annuity backed by the insurer's general account with a guaranteed payout leaves investment risk with the insurer, placing it in the exempt insurance category rather than treated as a security.
- C. Correct. A variable annuity's returns depend on the performance of an underlying separate account with investment risk borne by the purchaser, so it is treated as a security subject to registration, unlike traditional fixed insurance/annuity products.
- D. A traditional fixed-rate deferred annuity offers insurer-guaranteed, declared returns rather than exposure to a separate investment account, so it falls under the insurance exemption.
- Source: Exam outline: NASAA Series 63 Exam Content Outline, accessed October 2026
Question 3, medium
A promoter sells ownership units in a managed avocado orchard. Investors contribute cash, have no role in day-to-day farming decisions, and are told profits will come solely from the promoter's management expertise and the pooled harvest sales. Under the Howey analysis typically used to define 'investment contract,' this arrangement is:
- A.Not a security, because agricultural products are always excluded from the definition
- B.Not a security, because real property (land and crops) is involved rather than a corporate instrument
- C.A security only if the units are certificated and transferable
- D.A security, because it involves an investment of money in a common enterprise with profits expected solely from the efforts of others
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Correct answer: D. A security, because it involves an investment of money in a common enterprise with profits expected solely from the efforts of others
The Howey test defines an investment contract as an investment of money in a common enterprise with an expectation of profits derived predominantly from the managerial efforts of a third party. The underlying asset being agricultural rather than corporate is irrelevant. This fact pattern (orchard units, passive investors, promoter-driven profits) is the textbook Howey scenario.
- A. There's no blanket agricultural exclusion from the securities definition; the Howey analysis applies regardless of the underlying asset class, including agricultural ventures.
- B. Involvement of real property doesn't take an arrangement outside the securities definition; Howey itself arose from a citrus grove investment scheme and applies regardless of whether tangible property underlies the arrangement.
- C. Certification or transferability of the units isn't a required element of the Howey test; the analysis turns on the investment-of-money/common-enterprise/profits-from-others'-efforts framework, not on the form of the instrument.
- D. Correct. Under Howey, an investment contract exists where there's an investment of money in a common enterprise with an expectation of profits derived solely from the efforts of others. Exactly the structure here, with passive investors relying entirely on the promoter's management.
- Source: Exam outline: NASAA Series 63 Exam Content Outline, accessed October 2026
Question 4, easy
A promissory note qualifies for an exemption from registration under the Uniform Securities Act. If the issuer makes materially false statements in selling the note, the antifraud provisions of the Act:
- A.Do not apply, since the security itself is exempt from registration
- B.Apply only if the buyer is a retail, non-institutional investor
- C.Apply only if the note is also a federal covered security
- D.Apply fully, because exemptions from registration never exempt a transaction from the antifraud provisions
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Correct answer: D. Apply fully, because exemptions from registration never exempt a transaction from the antifraud provisions
Registration exemptions and transaction exemptions relieve a party only from the registration requirement. The antifraud provisions apply to every offer, sale, or purchase of a security in the state, exempt or not, and regardless of the purchaser's sophistication.
- A. This confuses registration exemption with antifraud exemption; the two are entirely separate under the Act, and no security or transaction is ever exempt from the antifraud provisions.
- B. The antifraud provisions protect all purchasers, institutional and retail alike; there's no carve-out based on the buyer's sophistication.
- C. Federal covered status affects which securities registration regime applies, not whether the antifraud provisions are triggered; those apply regardless of federal covered status.
- D. Correct. Registration exemptions relieve the issuer of filing requirements, but the antifraud provisions apply to every sale of every security, exempt or not, and to every transaction, exempt or not.
- Source: Uniform Securities Act (2002) Section 501 (general fraud), accessed October 2026
Question 5, hard
A registered broker-dealer's trading desk receives an unprompted call from an existing brokerage customer who, entirely on his own initiative, asks to buy shares of a thinly-traded company in the secondary market. No agent recommended or solicited the trade. This nonissuer transaction is most likely treated as:
- A.An exempt unsolicited brokerage transaction
- B.An exempt transaction that is also free of the antifraud provisions
- C.A nonexempt transaction unless the security is federally covered
- D.A nonexempt transaction because a registered broker-dealer executed it
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Correct answer: A. An exempt unsolicited brokerage transaction
Unsolicited brokerage (nonissuer) transactions. Where the broker-dealer executes an order at the customer's own initiative without any solicitation. Are an exempt transaction, regardless of how thinly the security trades or whether the customer is retail or institutional.
- A. Correct. Section 402(b)(13) of the Uniform Securities Act exempts unsolicited nonissuer orders that a registered broker-dealer executes. The customer initiates the order and no agent recommends it, so the trade is exempt from registration. The security's trading volume does not matter. The antifraud provisions still apply.
- B. Wrong. The exemption covers only the registration requirement. Antifraud liability applies to every securities transaction, including exempt ones, so an unsolicited order does not escape it.
- C. Wrong. The exemption does not depend on the security being federally covered. It exists so a nonissuer trade in a security that is not registered in the state can still go forward when the customer initiates the order without solicitation.
- D. Wrong. Execution through a registered broker-dealer is a condition of the exemption, not a reason to deny it. An unsolicited order handled by a registered broker-dealer is exempt from registration even though the security is not registered in the state.
- Source: Exam outline: NASAA Series 63 Exam Content Outline, accessed October 2026
Question 6, hard
A state Administrator receives credible complaints that a firm registered with the SEC as an investment adviser has misrepresented its fees to clients in the state. The firm argues NSMIA leaves the state without authority. Which is correct?
- A.The state lacks authority until the SEC takes action against the firm.
- B.State authority is limited to collecting the firm's notice filing and fee.
- C.NSMIA preserves the state's authority to investigate and bring enforcement actions for fraud or deceit against federal covered advisers.
- D.The state may act if the firm has a place of business there, and not otherwise, because NSMIA confines state oversight to advisers with a local office.
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Correct answer: C. NSMIA preserves the state's authority to investigate and bring enforcement actions for fraud or deceit against federal covered advisers.
NSMIA limits state registration of federal covered advisers but leaves states free to investigate and prosecute fraud or deceit by them. The Administrator may act on the complaints without waiting for the SEC.
- A. States do not have to defer to the SEC before pursuing fraud claims.
- B. Notice filing is only one function; antifraud enforcement authority remains.
- C. Correct. Antifraud authority over federal covered advisers is expressly preserved.
- D. NSMIA preserves state antifraud authority over federal covered advisers whether or not they have a local office.
- Source: 15 U.S.C. § 80b-3a, accessed October 2026

Sources

Uniform Securities Act (2002) Section 501 (general fraud), checked October 2026
15 U.S.C. § 80b-3a, checked October 2026

Questions are drafted with help from AI and published only after a person reviews and approves them. How these questions are made

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