Subscription Agreement

An LLC's operating agreement establishes that the LLC is manager-managed, with a single named manager holding exclusive authority to bind the LLC to contracts and investments; the members have no direct authority to act for the LLC. A member who is not the manager, but who holds a large ownership percentage, submits a subscription agreement to purchase a private placement on the LLC's behalf. May the firm accept it?

1. A.Yes -- a member holding a large enough ownership percentage has authority to bind the LLC regardless of the manager-managed structure.Wrong. Ownership percentage is a measure of economic interest, not of authority to bind the entity, which the operating agreement vests in the manager alone.
2. B.Yes -- because private-placement subscriptions specifically may be signed by any member regardless of the LLC's management structure.Wrong. There is no private-placement-specific exception to an LLC's own management structure; the operating agreement's allocation of authority still controls.
3. C.No -- in a manager-managed LLC, only the designated manager has authority to bind the entity; a member's ownership percentage does not confer that authority.Correct. The operating agreement vests authority to bind the LLC in the manager specifically, not in members based on ownership size.
4. D.No -- but only because LLCs are categorically ineligible to subscribe to private placements regardless of who signs.Wrong. LLCs are not categorically ineligible to subscribe to private placements; the issue here is which person within the LLC has signing authority, not the entity type.

Why: In a manager-managed LLC, authority to bind the entity rests with the designated manager, not with members individually, regardless of the size of a member's ownership stake. Ownership percentage measures economic interest, not authority to act for the entity, so a large membership stake does not substitute for being the designated manager.

A firm's written supervisory procedures require a principal's signature on the account record before any program subscription is accepted from a new customer. A representative, confident the customer is suitable, accepts a subscription agreement and forwards it to the sponsor the same day, intending to obtain the principal's signature afterward. Has the representative satisfied the firm's supervisory requirement?

1. A.Yes, because the representative reasonably believed the customer was suitable.Wrong. The representative's own belief does not substitute for the principal's required independent review before the transaction.
2. B.Yes, because the principal's signature was still obtained, just after the subscription was forwarded.Wrong. Obtaining approval after the transaction defeats the purpose of a precondition-based review requirement.
3. C.No, because the firm's procedure requires approval before the account is used, and that did not happen here.Correct. The supervisory approval must precede the transaction, not follow it as a formality.
4. D.No, but only because the sponsor, not the firm, determines when approval must occur.Wrong. The timing requirement comes from the firm's own written supervisory procedures, not from the sponsor.

Why: No. A firm's written supervisory procedure requiring approval before the account is used means the approval must occur before the transaction, not after it as a formality to be cleaned up later. The representative's own confidence in the customer's suitability does not substitute for the principal's independent review, which is the entire point of requiring a second, supervisory signature. Forwarding the subscription before that review took place means the firm accepted business from an account that had not yet been approved under its own procedures. The sequence matters: approval is a precondition to the transaction, not a step that can be completed afterward.

An investor reviewing a limited partnership offering wants to know exactly how the general partner will be compensated and how income, loss, capital gain and cash distributions will be divided among the partners. Which document fixes those terms?

1. A.The agreement of limited partnershipCorrect. That document fixes compensation and every allocation and distribution term.
2. B.The subscription agreement signed by the investorWrong. It records the commitment and representations of the investor, not the economics of the program.
3. C.The annual Schedule K-1 furnished to each partnerWrong. It reports what was allocated for a year rather than establishing how allocations are made.
4. D.The dealer agreement between the sponsor and selling firmsWrong. That paper governs selling compensation, a different subject from partner allocations.

Why: The agreement of limited partnership is the constitutional document of the program. It identifies the types of partners, states the capital contribution obligations, sets the allocation of income, loss, capital gain and cash distributions, and fixes the compensation of the general partner. Other documents in the offering describe or report on those terms but do not establish them. Changing any of that economics means amending the partnership agreement, which is one of the matters the limited partners may vote on.

A closely held corporation wants to subscribe for units of a program, and its treasurer signs the subscription agreement. Before the firm transmits it, what establishes that the treasurer could sign?

1. A.The signature on the subscription agreement, which itself carries a representation of authority to sign.Wrong. A document cannot supply the authority on which its own validity depends.
2. B.The corporation's most recent audited financial statements, which name its serving officers.Wrong. Naming an officer is not the same as delegating a power to that officer.
3. C.A verbal confirmation from a second officer, written up in the representative's file notes.Wrong. A note of a telephone call is not the corporate record of a delegated power.
4. D.A corporate resolution identifying the officers authorized to open the account and commit the corporation.Correct. That resolution is exactly the record that names who may act and to what extent.

Why: When the customer is an entity, the firm must both identify and verify the entity and establish which natural persons may act for it. A corporate resolution is the record that names those persons and defines what they may do, whether that is opening the account, committing funds or withdrawing them. Without it the firm has no basis for accepting an instruction from any particular officer, and an unauthorized subscription can later be repudiated by the corporation. A trust would supply the trust instrument or a certification of trust for the same purpose, and a partnership its partnership agreement.