Quick Answer
A firm cannot process a private placement purchase until the issuer has accepted the investor's subscription agreement, usually by countersignature. It also creates internal records: a blotter entry, principal approval, and payment instructions. A narrow exception excuses the order memorandum itself for subscription-way transactions, if the firm keeps a substitute document instead.
Processing a private placement transaction starts with paperwork the firm does not fully control. The issuer has to act first.
What Must Happen Before a Firm Can Process a Purchase?
- Before a firm can process a private placement purchase, it needs the subscription agreement the issuer has accepted, commonly by countersignature.
- What the subscription agreement is, what the investor represents in it, and how it gets signed and accepted are account-opening steps, covered in the customer-documentation unit's lesson on subscription agreements. This unit's concern is narrower: the firm has nothing to process until the issuer's acceptance has happened.
Exam Tip: Gotchas
- An investor signing the subscription agreement and sending funds does not give the firm a transaction to process. The file isn't ready for processing until the issuer has accepted the subscription.
What Internal Documents Does the Firm Keep Alongside It?
- Alongside the accepted subscription agreement, the firm keeps its own
internal processing documents:
- the blotter entry recording the transaction,
- the principal's review and approval of it, and
- the payment or wire instructions used to move the investor's funds.
- Where order memoranda and blotters normally come from is covered in the books-and-records unit's lesson on the records a firm must make. That lesson gives the categories this exam leans on, not every category the records-creation rule lists. This lesson covers only the one exception that applies to a subscription-way transaction.
When Is the Order Memorandum Not Required?
For a purchase, sale, or redemption made on a subscription-way basis, meaning directly from or to the issuer rather than through the secondary market, the records-creation rule says the order memorandum need not be made at all, provided the firm keeps the right substitute document instead:
| Transaction type | Substitute document the firm must keep |
|---|---|
| Purchase | A copy of the customer's or non-customer's subscription agreement |
| Sale or redemption | A copy of any other document the issuer requires |
- A firm may still create an order ticket as internal practice, but the rule does not require it.
- The blotter entry is a different record, and this exception does not touch it. A subscription-way transaction still needs a blotter entry.
Exam Tip: Gotchas
- The subscription-way exception only reaches the order memorandum. Do not extend it to the blotter, which stays required regardless of how the transaction was made.
What Should You Check on Exam Day?
- Confirm the issuer has accepted the subscription agreement before treating a transaction as ready to process.
- Match the substitute document to the transaction type: subscription agreement for a purchase, any issuer-required document for a sale or redemption.
- Remember the order-memorandum exception applies only to subscription-way transactions, directly with the issuer.
- Keep the blotter requirement separate; the exception never reaches it.