Letter of Intent (LOI)
Rights of accumulation help investors who have already built up holdings. But what about investors who plan to invest a large amount over time? A letter of intent lets them lock in breakpoint pricing upfront.
How a Letter of Intent Works
A letter of intent (LOI) is a non-binding pledge to invest a specified amount over a 13-month period to qualify for breakpoint pricing:
- The investor gets the reduced sales charge on ALL purchases during the LOI period
- Can be backdated up to 90 days to include recent purchases
- The fund holds some shares in escrow as collateral
- The LOI is not binding. The investor is not legally obligated to complete the investment
Exam Tip: Gotchas
- An LOI is not binding. The investor can walk away, but they lose the reduced sales charge.
- 90 days backdating and 13 months forward are frequently tested numbers.
Think of it this way: An LOI is like a loyalty card at a coffee shop that gives you the discount upfront. You promise to buy 50 coffees over the next year, and they give you the bulk rate starting today. If you only buy 20, they charge you the difference for the coffees you already drank at the lower price.
What Happens If the LOI Is Not Fulfilled?
If the investor does NOT invest the pledged amount within 13 months:
- The fund retroactively charges the higher sales charge that should have applied
- The difference is collected from the escrowed shares
- The investor keeps all shares purchased, but pays the correct (higher) sales charge after the fact
Exam Tip: Gotchas
- Escrowed shares protect the fund, not the investor. They cover the sales charge difference if the LOI is not fulfilled.
Key LOI Rules
| Rule | Detail |
|---|---|
| Duration | 13 months from the date of the LOI (or from the backdated start) |
| Backdating | Can be backdated up to 90 days to capture recent purchases |
| Binding? | No - investor is not obligated to invest |
| Escrow | Fund holds shares in escrow to cover potential sales charge adjustment |
| Penalty for not completing | Higher sales charge applied retroactively (from escrowed shares) |
Example
An investor signs an LOI to invest $50,000 over 13 months in a Class A fund. The breakpoint at $50,000 gives a 4.50% sales charge instead of 5.75%:
- All purchases during the 13 months get the 4.50% rate immediately
- If the investor only invests $30,000 by the end of the period, the fund retroactively adjusts to the 5.75% rate and collects the difference from escrowed shares
Exam Tip: Gotchas
- An LOI can be backdated 90 days and applies for 13 months going forward. If the investor signed the LOI on June 1 and backdates it to March 3, the 13-month period runs from March 3 through April 2 of the following year.
- The 13-month period is measured from the LOI date (or backdated date), not from the first purchase.