Reading the documents behind a verbal promise

The case and its answers

Every question of this case, with its answer and why each other option is wrong.

A prospective investor receives the Pine Fund’s private placement memorandum (PPM), a subscription agreement and a proposed side letter. The PPM describes an eight-year closed-end strategy, material risks and no ordinary redemption. The subscription agreement records a ₹200 lakh commitment and the investor’s obligation to honour valid capital calls. The proposed side letter would give this investor an additional quarterly portfolio report, but it has not been signed by the authorised parties. A salesperson verbally promises an exit after two years and says the side letter is already binding. For this exercise, a legal review confirms that no separate exit right exists and that the draft side letter has not taken effect.

Treat the legal-review conclusions as facts of this hypothetical case.

No universal legal rule about every side letter is being asserted.

1. Q1Which document records the investor’s specific ₹200 lakh funding commitment?

   • A

     Option A. The unsigned reporting side letter.

     Why it is wrong: That draft concerns additional reporting, not the funding commitment.

   • B

     Option B. A past fund’s performance presentation.

     Why it is wrong: No such presentation sets this investor’s commitment.

   • C

     Option C. The salesperson’s oral exit promise.

     Why it is wrong: That promise is inconsistent with the confirmed documents and review.

   • D

     Option D. The subscription agreement. — Correct answer

   Answer: D. The subscription agreement records the ₹200 lakh commitment and the duty to meet valid calls. The PPM provides broader fund terms and risks. The side letter concerns additional reporting. Remember: Distinguish investor-specific commitments from general disclosures.

   Hint, shown before you answer in practice mode: Look for the investor-specific obligation stated in the passage.

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2. Q2Which exit description is supported by the documents and legal review?

   • A

     Option A. An immediate exit right once the first report arrives.

     Why it is wrong: The reporting provision does not create a redemption right.

   • B

     Option B. A guaranteed exit after two years.

     Why it is wrong: The legal review confirms that no separate exit right exists.

   • C

     Option C. An ordinary daily redemption facility.

     Why it is wrong: The PPM explicitly excludes ordinary redemption.

   • D

     Option D. An eight-year closed-end strategy with no established two-year exit right. — Correct answer

   Answer: D. The PPM and the legal review support an eight-year closed-end strategy. Neither the sales conversation nor an extra reporting clause establishes the claimed two-year liquidity. Remember: Verify exit rights in the effective documents.

   Hint, shown before you answer in practice mode: Use the documented rights, not the verbal assurance.

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3. Q3Can the distributor say the additional quarterly reporting right has taken effect?

   • A

     Option A. No. The case’s legal review says the unsigned draft has not taken effect. — Correct answer

   • B

     Option B. No investor can ever receive additional reporting rights.

     Why it is wrong: The case does not support that universal restriction.

   • C

     Option C. Yes, because a draft exists.

     Why it is wrong: Existence of a draft does not override the stated review conclusion.

   • D

     Option D. Yes, because reporting and redemption mean the same thing.

     Why it is wrong: Reporting provides information. Redemption returns capital.

   Answer: A. The proposed side letter is not yet effective on the stated facts. The distributor should describe it as a proposal until the necessary execution and review steps are completed. Remember: Check whether a negotiated term is actually effective.

   Hint, shown before you answer in practice mode: Apply the specific status established by the legal review.

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4. Q4What is the best next step before the investor relies on the sales description?

   • A

     Option A. Correct the exit claim and reconcile the effective documents and proposed terms with the investor. — Correct answer

   • B

     Option B. Assume the side letter cancels the entire PPM.

     Why it is wrong: The draft is ineffective and concerns only reporting.

   • C

     Option C. Delete the risk page from the PPM.

     Why it is wrong: Removing disclosure would not create the promised exit right.

   • D

     Option D. Tell the investor that the commitment is only an optional donation.

     Why it is wrong: The subscription agreement establishes a funding obligation.

   Answer: A. The material mismatch concerns both liquidity and the status of reporting rights. Correcting it and explaining the effective documents lets the investor assess the actual commitment rather than a verbal promise. Remember: Resolve material inconsistencies before investment.

   Hint, shown before you answer in practice mode: Resolve the discrepancy before obtaining reliance or consent.

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