Organization And Offering Expenses

An investor subscribes for $10,000 of units in Amberfield Growth Program. The prospectus discloses an 8% sales load and 2% of the offering price allocated to organization and offering expenses, both deducted from the subscription amount before the balance is put to work in the program. How much of the investor's $10,000 is actually invested in the program's operations?

1. A.$9,200Wrong. This subtracts only the 8% sales load and omits the 2% offering expense.
2. B.$9,800Wrong. This subtracts only the 2% offering expense and omits the 8% sales load.
3. C.$8,000Wrong. This treats the two percentages as far larger than their actual combined 10%, overstating total deductions.
4. D.$9,000Correct. $10,000 x (1 - 0.08 - 0.02) = $10,000 x 0.90 = $9,000.

Why: Total deductions are 8% + 2% = 10% of the subscription amount, leaving 90% actually invested: $10,000 x 0.90 = $9,000.

A representative tells a prospective investor that a program's organizational and offering expenses are well within what FINRA allows, without checking the specific offering's prospectus. Why is this representation a problem even if the program turns out to be compliant?

1. A.Organizational and offering expenses are never limited by any rule, so the statement is meaningless.Wrong. A regulatory limit on organization and offering expenses does exist; the problem is the unverified claim, not the absence of any rule.
2. B.It is pre-approved marketing language that may be used for any direct participation program.Wrong. A specific factual claim about one program's expense ratio is not generic language that applies interchangeably to every offering.
3. C.The limit and the program's actual expense ratio must be verified in that program's own offering documents, not stated from memory.Correct. A representative must base a specific factual claim about a program's expenses on that program's own disclosed figures rather than a general assumption.
4. D.Only the SEC, not FINRA, has any rule addressing organization and offering expenses.Wrong. FINRA's own rules address organization and offering expense limits for direct participation programs.

Why: FINRA rules impose limits on organization and offering expenses for direct participation programs, but the applicable ceiling and the specific program's actual expense ratio are facts that exist in that program's offering documents, not figures a representative should state from memory or assumption. Making the claim without having verified it in the current prospectus risks passing along an inaccurate representation to the customer, even if it happens to be true by coincidence. A representative's obligation is to base statements about a specific offering on that offering's own disclosed figures, not on a general impression of what regulations typically allow.

Cormorant Basin Program's prospectus discloses total underwriting compensation (sales load plus other selling commissions) of 9% of the gross offering price, and organization and offering expenses of 3% of the gross offering price. Expressed as a percentage of an investor's subscription, what percentage is actually available for investment in program assets and operations?

1. A.88%Correct. 100% - 9% - 3% = 88%.
2. B.91%Wrong. This subtracts only the 9% underwriting compensation and omits the 3% offering expense.
3. C.97%Wrong. This subtracts only the 3% offering expense and omits the 9% underwriting compensation.
4. D.12%Wrong. This is the deducted percentage, not the percentage retained for investment that the question asks for.

Why: The retained percentage is 100% minus both deductions: 100% - 9% - 3% = 88% of the subscription is available for investment.

Windward Basin Program prices units at $1,000, discounted to $940 per unit for subscriptions of 40 units or more. Of the price actually paid per unit, 7% is underwriting compensation and 3% is organization and offering expense, both computed on the price actually paid. An investor subscribes for 40 units. In dollars, how much of her total subscription is actually invested in the program?

1. A.$36,000Wrong. This computes the deductions against the undiscounted $1,000 price instead of the $940 price actually paid.
2. B.$37,600Wrong. This is the total price paid before subtracting underwriting compensation and offering expenses.
3. C.$34,968Wrong. This subtracts only the 7% underwriting compensation and omits the 3% offering expense.
4. D.$33,840Correct. $37,600 x (1 - 0.07 - 0.03) = $37,600 x 0.90 = $33,840.

Why: The discounted price applies first: 40 x $940 = $37,600 total paid. Underwriting compensation and offering expenses together take 10% of the price actually paid, leaving 90%: $37,600 x 0.90 = $33,840.