General Partner

Two companies agree to jointly undertake a single specific construction project, sharing profits, losses, and management of that one project, but they do not intend to continue operating together as an ongoing business once the project is complete. What best describes this arrangement, and how does it compare to a general partnership for liability purposes?

1. A.A joint venture, a partnership-like arrangement limited to a single undertaking; liability principles similar to a general partnership generally applyCorrect. A joint venture is limited in scope to a single undertaking, while similar liability principles to a general partnership generally apply.
2. B.A limited partnership, since the two companies are limiting the arrangement to a single projectWrong. Limiting a project's scope does not create limited partner liability protection; nothing here suggests capped liability for either company.
3. C.A joint venture, which differs from a general partnership by eliminating each party's personal liability entirelyWrong. A joint venture does not eliminate personal liability; similar liability principles to a general partnership generally apply.
4. D.A general partnership identical in every respect to an ongoing business partnership, since both involve shared profits and managementWrong. This understates the real distinction in scope and duration between a joint venture and an ongoing general partnership.

Why: This describes a joint venture, a partnership-like arrangement limited to a single undertaking or project rather than an ongoing business. Liability principles similar to those governing a general partnership generally apply within a joint venture, including exposure for obligations related to the joint undertaking. The key distinguishing feature from an ordinary general partnership is scope: a general partnership contemplates an ongoing business relationship, while a joint venture is limited to the specific project or transaction the parties have agreed to undertake together.

In a drilling program using functional allocation, intangible drilling costs make up the large majority of the well's total cost, and the limited partners fund all of the intangible costs while the general partner funds the smaller tangible cost category. What does this imply about the limited partners' revenue interest relative to the general partner's?

1. A.The general partner typically receives the larger revenue interest, since sponsors are always allocated a disproportionate shareWrong. Under functional allocation, the revenue split tracks cost contribution, not a fixed promotional assumption favoring the sponsor.
2. B.The limited partners typically receive the larger revenue interest, reflecting that they funded the larger cost categoryCorrect. Functional allocation ties revenue share to cost contribution, so funding the larger cost category means a larger revenue share.
3. C.The two parties' revenue interests are always set equal regardless of which cost category each fundedWrong. Functional allocation specifically ties revenue interest to cost contribution rather than setting the split equally.
4. D.Revenue interest under functional allocation has no relationship to which cost category each party fundedWrong. This is the opposite of how functional allocation works; the revenue split is defined by which cost category each party funded.

Why: Because functional allocation ties each party's revenue interest to the cost category it funded, and the limited partners funded the larger cost category, the limited partners typically receive the larger share of revenue interest as well. This is a direct consequence of the cost split, not the result of any promotional or disproportionate arrangement favoring the sponsor. A larger revenue share for limited partners here reflects that they funded the larger share of total well cost, which is the opposite of a structure where the sponsor's share is inflated relative to what it contributed.

A customer hands his representative a cheque made payable to the escrow agent named in a program's prospectus. What must the representative do with it?

1. A.Record its receipt and transmit it promptly, without holding it while the subscription is reviewed.Correct. Recording and moving it on at once is the whole of the firm's role.
2. B.Hold it until the general partner accepts the subscriber, then send it with the countersigned agreement.Wrong. Holding customer money pending an acceptance is exactly what the transmittal duty forbids.
3. C.Deposit it to the firm's own account and remit an equal amount to the escrow agent after closing.Wrong. Redirecting the payee, even briefly, puts the firm in possession of money it should never touch.
4. D.Return it and ask the customer to write a replacement payable to the broker-dealer instead.Wrong. The offering documents name the payee, and rewriting it defeats the protection escrow provides.

Why: A payment a representative receives for a customer's account must be recorded and moved on promptly; the firm's role here is transmittal, not custody. The instrument is already payable to the escrow agent precisely so the money is never the firm's to hold, and delaying it while the subscription is reviewed puts the firm in the position the arrangement exists to prevent. Review of the subscription and movement of the money run in parallel, not in sequence. Had the offering carried no contingency and no escrow, the payee would differ but the duty to record and transmit promptly would be identical.

A limited partner in an oil and gas drilling program is told that his units represent a working interest. What obligation does that description carry?

1. A.An obligation to accept unlimited personal liability for the program's debtsWrong. Unlimited liability follows from general partner status, not from the type of interest held.
2. B.An obligation to buy further units if a well has to be deepened or reworkedWrong. Mandatory assessments are a term of a particular program rather than an attribute of the interest.
3. C.An obligation to bear a share of program costs, including the wells that failCorrect. Cost sharing is the defining burden that comes attached to the revenue share.
4. D.An obligation to market his share of production through the operator at posted pricesWrong. Marketing arrangements are contractual and are not what the term denotes.

Why: The outline defines a working interest as an interest in production revenues in which the partners share program costs. Revenue and cost travel together in this interest: the holder funds drilling, completion and operating expenses in proportion to the interest held and receives production revenue in the same proportion. A dry hole is a cost like any other, so a working interest holder pays for the wells that fail as well as the wells that produce. The two cost-free interests, the override and the reversionary working interest, are defined precisely by the absence of this obligation.