Company Name: Diplomat, Ltd.
Public Availability Date: 02-13-1984
INQUIRY LETTER 1Watkins Ludlam & Stennis
20th Floor, Deposit Guaranty Plaza,
Post Office Box 427
Jackson, Mississippi 39205
TELEPHONE (601) 354-3456 December 01, 1983 1933 Act/3(a)(11) and Rule 147 Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
Washington, D.C. 20549 Re: The Diplomat, Ltd. Gentlemen: On behalf of our client, The Diplomat, Ltd., we hereby submit the following
information and request for an interpretative letter from the staff of the
Securities and Exchange Commission (the "Commission"). The Diplomat, Ltd. is a limited partnership (the "Partnership") formed under the
laws of the State of Mississippi with its principal office in the State of
Mississippi. The Partnership was formed on June 20, 1983 with Hagaman-Oates &
Associates as its general partner (the "General Partner") and Frank H. Hagaman
as its initial limited partner (the "Initial Limited Partner"). The General
Partner is a general partnership with the Initial Limited Partner and Gordon L.
Oates as its principals. Both the Initial Limited Partner and Mr. Oates are bona
fide principal residents of the State of Mississippi, and the principal office
of the General Partner is located in the State of Mississippi. The Partnership was formed for the purpose of acquiring, owning and operating an
82-unit residential apartment complex (the "Complex") to be constructed in
Jackson, Mississippi. The capitalization of the Partnership is to consist of a
loan from a lending institution secured by a deed of trust on the Complex, and
$2,300,000 of equity. The equity is to be raised by the Partnership offering 92
units of limited partnership interest (the "Units") for a purchase price of
$25,000 each. The purchase price for each of the Units will be payable, at the sole election
of each investor, either (1) wholly in cash upon execution of a subscription
agreement, or (2) $5,000 in cash upon execution of a subscription agreement,
with the balance of the $25,000 purchase price to be paid in the form of an
unconditional promissory note payable to the order of the Partnership to be
delivered with the subscription agreement (the "Promissory Note"). Each
Promissory Note will be in the original principal amount of $20,000 and will
bear interest at the prime rate of interest in effect from time to time, plus
one percent (1%). Principal is payable in four (4) equal annual installments of
$5,000 each, with the first installment due one year after Closing (as
hereinafter defined). Accrued interest is payable semiannually until the
principal of the Promissory Note is paid in full. When subscription agreements, accompanied by the required cash payments or cash
payments and Promissory Notes, have been received with respect to all 92 of the
Units, the Partnership will adopt an amended and restated limited partnership
agreement (the "Partnership Agreement") and file an amended and restated
certificate of limited partnership pursuant to which investors will become
limited partners of the Partnership (the "Limited Partners") and the Initial
Limited Partner will cease to be a limited partner of the Partnership. These
events are intended to conclude the sale of the Units and are known as the
"Closing." The Partnership proposes to offer the Units for sale only to bona fide principal
residents of the State of Mississippi in reliance upon the exemption from
registration provided by Section 3(a)(11) of the Securities Act of 1933, as
amended (the "Act"), and Rule 147 promulgated thereunder ("Rule 147"). The
offering would be registered by qualification under the Mississippi Securities
Act. It is our position that sale of the Units occurs for purposes of Section
3(a)(11) of the Act and Rule 147 at the time of the Closing. However, we are
concerned that the Commission may consider the sale as not occurring until all
of the installments due under the Promissory Notes are paid. The reasons for our
position are set forth below. Section 79-13-9 of the Mississippi Uniform Limited Partnership Law provides that
the contributions of a limited partner may be cash or other property. Section
79-13-5(1)(f) requires the certificate of limited partnership to include a
description of and the agreed value of the other property. The certificate of
limited partnership of the Partnership and the Partnership Agreement will
provide that each Promissory Note will be considered to be the contribution of
other property to the capital of the Partnership by each Limited Partner within
the meaning of Section 79-13-5(1)(f) and that the value of such other property
will be equal to the face amount of the Promissory Note. The Partnership Agreement and the Promissory Note provide that if any Limited
Partner fails to make timely payment of any installment required under his
Promissory Note, the General Partner may take any or all of the following
actions: (a) The Unit for which the installment on the Promissory Note is owed may be
declared by the General Partner to be forfeited to the Partnership, and
thereafter may be cancelled or resold by the Partnership in the same manner as
though such Unit had never been sold, at such price as the General Partner in
its sole discretion shall determine, and all cash paid to the Partnership by a
defaulting Limited Partner shall be forfeited and such defaulting Limited
Partner shall thereafter have no interest in the Partnership whatsoever with
respect to such defaulted Unit; or (b) The General Partner may elect not to pay such defaulting Limited Partner any
cash distributions and to apply any undistributed amounts to payment of the
defaulting Limited Partner's Promissory Note; or (c) The General Partner may elect for any purpose to deem such defaulting
Limited Partner not to be a Limited Partner. Thus, the payment of the purchase price for the Units in either cash or cash and
Promissory Notes constitutes full consideration, and each investor becomes a
full Limited Partner at Closing, not upon final payment of the installments due
under his Promissory Note. Each investor remains a Limited Partner to the full
extent of the interest represented by the Unit he has purchased, unless the
Limited Partner defaults on his Promissory Note and the General Partner elects
one of the remedies specified in subparagraph (a) or (c) above. In no event is a
Limited Partner who defaults on his Promissory Note entitled to a pro-rata
interest in the Partnership based on the amount of cash actually paid in to the
Partnership, as might be the case if the installment payments on the Promissory
Note were made for the purchase of incremental interests in the Partnership. In addition to the above reasons supporting our position, we also note that it
would appear from the definition of the term "accredited investor" in Regulation
D that the Commission would treat the payment of cash plus the Promissory Note
as sufficient to constitute a sale for purposes of Regulation D. Subparagraph 5
of that definition speaks in terms of a person purchasing for, among other
things, "an unconditional obligation to pay cash. . . which obligation is to be
discharged within five years of the sale. . . ." (emphasis added). Since the
Promissory Note is an unconditional obligation to pay within five years, it
would seem to represent sufficient consideration to consummate a sale under
Regulation D, and, we would suggest, should also be sufficient for purposes of
Section 3(a)(11) of the Act and Rule 147. On the basis of the above, we respectfully request that the staff advise us that
it agrees with our position that sale of the Units will occur for purposes of
Section 3(a)(11) of the Act and Rule 147, including specifically paragraphs (d)
and (e) of Rule 147, at the time of the Closing. Pursuant to Securities Act Release No. 6253, we have enclosed seven (7) copies
of this request. Very truly yours, WATKINS LUDLAM & STENNIS David L. Martin dlm INQUIRY LETTER 2Watkins Ludlam & Stennis 20th Floor, Deposit Guaranty Plaza, Post Office Box 427 Jackson, Mississippi 39205 TELEPHONE(601) 354-3456 January 06, 1984 1933 Act/3(a)(11) and Rule 147 Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
Washington, D.C. 20549 Re: The Diplomat, Ltd. Gentlemen: By our letter dated December 1, 1983 we requested an interpretative letter
regarding the offering of units of limited partnership interest (the "Units") by
our client, The Diplomat, Ltd. (the "Partnership"), in reliance upon the
exemption from registration provided by Section 3(a)(11) of the Securities Act
of 1933 and Rule 147 thereunder. Pursuant to a January 5, 1984 telephone
conversation between the undersigned and a member of your staff concerning our
request, this will confirm that the general partner of the Partnership has
represented that, if any investor limited partner of the Partnership fails to
make timely payment of the installments due under the limited partner's
promissory note paid as part of the consideration for one or more of the Units,
the general partner intends immediately upon such default to undertake
collection proceedings and take one or more of the actions which the general
partner has authority to take under the partnership agreement. The text of this
representation, signed by the general partner, is enclosed for your information. Very truly yours, WATKINS LUDLAM & STENNIS David L. Martin DLM:dh Enclosure REPRESENTATION OF THE GENERAL PARTNER OF THE DIPLOMAT, LTD. The undersigned General Partner of The Diplomat, Ltd., a Mississippi limited
partnership (the "Partnership"), does hereby represent that, if any Limited
Partner of the Partnership fails to make timely payment of the installments due
under the Limited Partner's Promissory Note paid as part of the consideration
for one or more Units of limited partnership interest in the Partnership, the
General Partner intend immediately upon such default to undertake collection
proceedings and take one or more of the actions which the General Partner has
authority to take under the Partnership Agreement. This representation is given
this 5th day of January, 1984. Hagaman-Oates & Associates
General Partner of The Diplomat, Ltd. By:
Frank H. Hagaman
General Partner of Hagaman-Oates & Associates By:
Gordon L. Oates
General Partner of Hagaman-Oates & Associates STAFF REPLY LETTERJanuary 13, 1984 RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE Re: The Diplomat, Ltd. ("Diplomat")
Incoming letters dated December 1, 1983 and January 6, 1984 You have asked for interpretive advice on the provisions of Rule 147 under the
1933 Act as they relate to an offering by Diplomat of limited partnership Units.
Specifically, you have asked whether the sale of Units on an installment basis
is permissible under Section 3(a)(11) of the 1933 Act and Rule 147. Rule 147(d) requires that offers and sales of securities be made only to persons
resident within the state of which the issuer is a resident. Rule 147(d)(2)
provides that, for purposes of determining the residence of offerees and
purchasers, an individual shall be deemed a resident of a state if his principal
residence is in the state "at the time of the offer and sale to him." You have
asked for our concurrence in your view that the sale of a Unit on an installment
basis should be deemed to occur at the time of closing. In Diplomat's offering,
an investor purchasing a Unit on an installment basis will deliver cash and an
unconditional promissory note. By the terms of the note, if an investor defaults
on his payments under the note, the general partner may take one or all of the
following actions. (a) The general partner may declare forfeiture to Diplomat of the Unit for which
the installment is owed and thereafter cancel or resell the Unit in the same
manner as though it had never been sold, at such price as the general partner in
its sole discretion shall determine. All cash paid to Diplomat by a defaulting
limited partner shall be forfeited, and the defaulting limited partner shall
thereafter have no interest with respect to the defaulted Unit. (b) The general partner may elect not to pay such defaulting limited partner any
cash distributions and to apply any undistributed amounts to payment of the
note. (c) The general partner may elect for any purpose to deem the defaulting limited
partner not to be a limited partner. In no event is a defaulting limited partner entitled to a pro-rata interest in
Diplomat based on the amount of cash actually paid to Diplomat. Based on the facts in your letters, and noting the substantial penalties to
investors that will be imposed in the event they do not make scheduled
installment payments, we are of the view that a sale to an investor on an
installment basis will be deemed consummated at the time of closing. Because
this position is based on the representations in your letters, any different
facts might require a different conclusion. Sincerely, David B.H. Martin, Jr.
Special Counsel
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