True or False: A share redemption program guarantees that an investor can redeem 100% of her investment at her original purchase price whenever she requests it.
- A.True.Wrong. There is no such guarantee; SRPs are limited, discretionary programs that can be modified, suspended, or terminated by the sponsor.
- B.False.Correct. SRPs do not guarantee full redemption at the original purchase price on demand; they are limited and subject to sponsor discretion.
Why: A share redemption program is not a guarantee. It typically offers limited, periodic redemption opportunities, subject to caps on the amount that can be redeemed across all requesting investors in a given period, redemption pricing that may differ from the investor's original purchase price, and the sponsor's ongoing discretion to modify, suspend, or terminate the program entirely. Investors relying on an SRP as their primary expected source of liquidity are relying on a feature that can be curtailed or eliminated, often precisely during the market conditions when investors most want to redeem.
A program's offering documents describe a share redemption program that allows investors to request repurchase of their interests, subject to an annual limit on the total dollar amount redeemed program-wide and a repurchase price set at a discount to the estimated value of the interest. What should this disclosure tell an investor about the program's liquidity?
- A.The interests are as liquid as an exchange-listed security because a redemption program exists.Wrong. The annual dollar cap and discounted repurchase price make this liquidity meaningfully more limited than an exchange-listed security.
- B.The redemption program guarantees full repurchase of any request submitted, at full estimated value.Wrong. The program is capped program-wide and priced at a discount, so full repurchase at full value is not guaranteed.
- C.The redemption program provides limited liquidity, capped in total dollar amount and priced at a discount to estimated value.Correct. Both the annual cap and the discounted repurchase price mean this feature offers limited, not full, liquidity.
- D.Redemption is entirely unavailable for the life of the program.Wrong. The stem describes an actual redemption program with real, if limited, terms, not a complete unavailability of redemption.
Why: A share redemption program of this kind provides limited, not full, liquidity: the program-wide annual dollar cap means not every redemption request is guaranteed to be honored in full, or even at all, if total requests exceed the cap, and the discounted repurchase price means an investor who does redeem receives less than the interest's estimated value. This is meaningfully different from a public market, where an investor could generally sell at will at the prevailing market price. Reading the redemption program's specific terms, not just its existence, is what tells an investor how much real liquidity the feature actually provides.