60 Series 22 Exam Concepts You Need to Know Before Test Day

FINRA Rule 2210 sorts communications into three buckets, and the bucket drives the paperwork. Retail communications go to more than 25 retail investors — including the firm's existing customers — within a 30-calendar-day period and need a registered principal's approval before first use. Institutional communications go to qualified institutional buyers and are exempt from filing and pre-approval requirements when the firm reasonably believes the recipient qualifies. Correspondence goes to 25 or fewer retail investors — customers and prospects alike — within 30 days; it skips pre-approval but is subject to principal review within 10 business days after use. Count all retail recipients and the calendar, then classify.

Memory hook:Retail over 25 needs approval first; institutional to QIBs skips filing; correspondence gets reviewed after the fact.

Rule 2210(c) adds a filing layer on top of approval for DPP material. Retail communications concerning direct participation programs must be filed with FINRA at least 10 business days before first use or publication. The member files, not the sponsor, and the clock runs on business days, not calendar days. Material already filed with the SEC under Rule 424 or similar prospectus-delivery provisions generally does not need a duplicate FINRA filing. The practical sequence is: draft the piece, obtain principal approval, file with FINRA, wait out the 10-business-day window, then put it to work.

Memory hook:DPP retail communications: principal approval, FINRA filing, then wait 10 business days before first use.

Volume reclassifies the communication. Any letter or electronic message sent to more than 25 retail recipients within a 30-calendar-day window is treated as a retail communication if the messages are substantially similar, even if the sender thinks of them as correspondence. At 25 or fewer, the same message stays correspondence: no principal pre-approval, but the firm must review retail correspondence within 10 business days after use. The trap is the identical template blast to a prospect list — once the count passes 25 recipients in 30 days, retail communication rules apply, including principal approval and, for DPP content, the FINRA filing requirement.

Memory hook:More than twenty-five similar messages in 30 days turns correspondence into a retail communication.

Section 5 blocks written offers before effectiveness, but three rules carve out safe channels. Rule 134 permits tombstone-style communications not deemed a prospectus: limited factual information about the security, the issuer, and how to obtain the registration statement. Rule 135 allows a notice of a proposed registered offering — essentially the fact that an offering is coming, with minimal detail. Rule 135a permits generic advertising that does not refer to any specific offering; the rule addresses generic advertisements of investment companies, not selling language for a particular deal. All three let a firm stay visible during the waiting period without conditioning the market or triggering Section 5 liability.

Memory hook:134 tombstones, 135 bare notices, 135a generic ads — all safe during the waiting period.

Section 5(c) prohibits offering a security for sale before the registration statement is effective, and 'offer' is defined broadly in Section 2(a)(3) to include any attempt or offer to sell. Before the filing, nothing can go out — no offers, oral or written. After filing, oral offers are permitted, but written offers must be a statutory prospectus. Sales are flatly prohibited until effectiveness. Gun-jumping is any pre-effective written communication that conditions the market, and the remedy can include a rescission right for buyers, which can unwind the entire offering.

Memory hook:No written offer before effectiveness; oral is fine after filing; sales wait for the effective date.

Think of Section 5 as three windows. Pre-filing period: no offers and no sales of any kind. Waiting period, from filing to effectiveness: oral offers are fine, written offers may be made by delivering a preliminary prospectus, and Rule 134 and Rule 135 communications are also permitted, but no sales can close. Post-effective period: sales proceed and the final prospectus must be delivered as required. The exam hinges on what activity is legal in each window — a written solicitation during the waiting period violates Section 5(b) unless it is a preliminary prospectus or a Rule 134 or 135 communication, while the same oral pitch is acceptable. Placing the activity on the registration timeline is the whole question.

Memory hook:Pre-filing: nothing. Waiting: talk or send the red herring, never sell. Post-effective: sell and deliver the prospectus.

Section 10 defines what a prospectus must contain; Rule 15c2-8 tells underwriters and dealers when to deliver it. During the waiting period, a preliminary prospectus must go to anyone expected to receive a confirmation of sale, so prospects can make an informed decision. After effectiveness, the final prospectus must be delivered at or before confirmation. Rule 174 then sets the dealer's ongoing obligation: for securities of non-reporting issuers — the typical DPP situation — dealers must deliver a prospectus for 90 days after the effective date, versus 40 days for securities of reporting companies.

Memory hook:Preliminary during the wait, final at confirmation, dealer duty ends 90 days after effectiveness for non-reporting issuers.

Both rules provide an unlimited-dollar private placement exemption, but they split on marketing. Rule 506(b) prohibits general solicitation and allows up to 35 non-accredited purchasers who are sophisticated, plus unlimited accredited investors; the issuer needs only a reasonable belief that accredited purchasers qualify. Rule 506(c) opens the door to general solicitation and advertising, but every purchaser must be accredited and the issuer must take reasonable steps to verify that — reviewing financial documents, credit reports, or third-party confirmations rather than relying on a checkbox. Both produce covered securities, so states cannot require registration of the offering.

Memory hook:506(b) stays quiet and reasonably believes; 506(c) shouts but must verify every accredited buyer.

Rule 504 and Section 4(a)(5) share a $5 million cap over a 12-month period but serve different issuers. Rule 504, a Regulation D exemption, imposes no disclosure requirements and no sophistication or accreditation limits on purchasers, though general solicitation is permitted only in narrow situations, such as offerings limited to accredited investors. Section 4(a)(5) is a statutory exemption available when the issuer sells solely to accredited investors; every purchaser must qualify. The exam hinge is the purchaser mix: an offering open to non-accredited friends and neighbors fits 504, while an accredited-only deal can travel under 4(a)(5).

Memory hook:Both cap at $5 million; 504 welcomes anyone, 4(a)(5) demands accredited-only.

Rule 507 disqualifies Rule 504 and Rule 506 offerings when a covered person — the issuer, its directors, the general partner, 20 percent beneficial owners, investment managers, or compensated solicitors — has a disqualifying event such as a securities-related felony or misdemeanor conviction, an injunction, or certain regulatory orders within the applicable look-back period. Disqualification kills the exemption even if the offering otherwise complies. Rule 508 forgives insignificant deviations from Regulation D terms when the issuer made a good-faith effort to comply, but it offers no relief for failing to verify accredited status under 506(c) or for bad-actor problems.

Memory hook:Bad actors kill 504 and 506; Rule 508 forgives slips but never verification failures.

Integration asks whether separate sales should be treated as one offering. Rule 502(b) gives a safe harbor: sales made more than six months before the start of a Regulation D offering, or more than six months after the offering is completed, are not integrated. Inside that window, a five-factor test applies — same class of securities, same issuer, around the same time or under a continuing plan, same type of consideration, and same general purpose. The exam usually turns on the safe harbor dates: offerings separated by more than six months stay separate; closer offerings risk integration, which can blow the exemption's dollar cap or its investor limits.

Memory hook:Six months clear on each side — before the start, after completion — keeps offerings separate.

Rule 503 requires the issuer to file Form D with the SEC electronically no later than 15 days after the first sale of securities in the offering — not the first offer, the first sale. The filing gives regulators basic facts: the issuer, its executives, the offering size, and sales compensation. Amendments are required for material changes, and a final amendment may be filed when the offering ends. The recurring exam trap is the trigger event: candidates see '15 days after the first offer' as a distractor. Anchor on the sale, count 15 days, and the answer falls out.

Memory hook:Form D: 15 days after the first sale, never the first offer.

Section 3(a)(11) exempts securities offered and sold only to residents of a single state, and Rule 147 provides the safe-harbor mechanics. The issuer must be organized in the state, derive 80 percent of gross revenues in-state, hold 80 percent of assets in-state, and use 80 percent of offering proceeds in-state. All purchasers must be residents, and the issuer must reasonably believe that at the time of sale. Resales are restricted: under the amended rule, securities cannot be sold to nonresidents for six months after purchase by an accredited investor and nine months for other purchasers.

Memory hook:Eighty percent in-state for revenues, assets, and proceeds; residents only; resales locked six to nine months.

In a firm commitment, the underwriter buys the securities and owns the price risk; in best efforts — the dominant DPP structure — the underwriter only tries to sell, and the sponsor keeps unsold units. Rule 10b-9 polices best-efforts offerings with a minimum contingency: the stated minimum must be reasonably related to the offering's stated objectives, customer funds must go into escrow, and if the minimum is not met by the disclosed termination date, escrowed money must be returned promptly. Without those protections, telling investors the deal is contingent on the minimum is a prohibited representation.

Memory hook:Best efforts means escrow, a reasonable minimum, and refunds if the target is missed by the deadline.

Sponsor-managed DPP offerings need a dealer-manager, and the relationship is defined by the dealer-manager agreement with the sponsor. The dealer-manager conducts due diligence, helps structure the program, reviews offering documents, solicits and allocates participation among selling broker-dealers, maintains the offering's books and records, and runs the wholesaling effort. The agreement spells out compensation, indemnification, due diligence obligations, and termination rights. On the exam, remember the direction of the contract: the dealer-manager works for the sponsor under this agreement, while selling dealers contract separately with the dealer-manager.

Memory hook:Dealer-manager answers to the sponsor; selling dealers answer to the dealer-manager.

The distribution chain has three tiers. The dealer-manager signs a selling dealer agreement with each participating firm, which sets that firm's responsibilities and compensation. Reallowance is the slice of the underwriting compensation the dealer-manager passes down to selling dealers for units they actually place — it is earned by selling effort, not just by signing up. Wholesalers are the dealer-manager's registered representatives who travel to selling firms and train their reps on the program's features; they market to the sales force, never to the public. Keep the tiers straight: sponsor to dealer-manager to selling dealer's reps.

Memory hook:Reallowance rewards actual sales; wholesalers train the sales force, never the public.

A finder occupies a narrow lane. Permissibly, a finder introduces a potential investor to the issuer or sponsor for a fee and steps back. The moment the finder discusses the merits of the offering, recommends the security, negotiates terms, or handles funds or securities, the activity becomes soliciting for a broker-dealer, which requires registration. The exam draws the line at conduct: introduction alone is fine; persuasion is not. Compensation contingent on a completed transaction is a warning sign regulators weigh, but the content of the conversation is what actually determines whether the finder crossed into brokerage.

Memory hook:Finders introduce and exit; anyone who persuades is soliciting and must register.

FINRA Rule 2310(b)(3) requires a member to exercise due diligence to learn the essential facts about every DPP offering it sells — this is a positive duty, not a defense you improvise later. The review must cover material statements and risk factors in the offering documents, compliance with registration or exemption rules, financial data and assets, management background and prior performance, the assumptions behind forecasts and projections, fees and use of proceeds, and the opinion of tax counsel. The member must have a reasonable basis for believing the program is economically sound before recommending it to anyone.

Memory hook:Before recommending a DPP, investigate the documents — risk factors, numbers, management, fees, and tax opinion.

Section 11 imposes liability on signers, directors, underwriters, and experts when the registration statement contains a material misstatement or omission. Damages run from the purchase price down to the value at the time of suit or the sale price. Non-experts can escape through the due diligence defense: after reasonable investigation, they had reasonable grounds to believe the statements were true. Experts are liable for the portions they certified and cannot use that defense. Section 12(a)(2) covers misleading prospectuses and oral communications, with rescission as the remedy and a reasonable-care defense available to sellers who did not and could not know.

Memory hook:Section 11 punishes the registration statement; Section 12 punishes the pitch; due diligence saves only the diligent.

FINRA Rule 5110 requires members participating in a public offering to file the underwriting documents with FINRA so it can review underwriting terms and compensation for excessiveness and unfair arrangements before the deal proceeds. Compensation above applicable limits must be justified or reduced. Separately, Securities Act Industry Guides dictate disclosure content by program type: Guide 2 covers oil and gas operations, Guide 4 governs prospectuses relating to interests in oil and gas programs, and Guide 5 sets requirements for registration statements relating to interests in real estate limited partnerships. Match the guide number to the asset class.

Memory hook:Guide 2 operations, Guide 4 prospectus, Guide 5 real estate LPs — match the guide to the asset.

Before any account is opened, the representative must match the account type to the customer's legal situation and gather the paperwork that proves it. Individual and joint accounts are straightforward, but trusts need the trust document showing the trustee's authority, corporations need a corporate resolution naming authorized signers, and anyone acting for another person needs a properly executed power of attorney. Registration changes matter because ownership is a legal fact, not a clerical detail: retitling assets or moving them into a different registration requires supporting documents and supervisory sign-off. If the paperwork does not authorize the person signing, the transaction should not proceed until the proper legal authorization is on file.

Memory hook:Trust paper for trustees, resolutions for officers, POA for agents — no document, no signature.

CIP is the anti-money-laundering gate: before the account is opened, the firm must collect and verify the customer's name, date of birth, address, and taxpayer identification number. KYC under FINRA Rule 2090 is broader — the firm must know the essential facts about each customer to spot red flags and serve the account appropriately. Regulation S-P governs privacy: customers receive an initial privacy notice describing the firm's information-sharing practices, and they generally have the right to opt out of the sharing of nonpublic personal information with nonaffiliated third parties. Exceptions exist for processing transactions, service providers bound by confidentiality, and disclosures required by law.

Memory hook:CIP proves identity, KYC knows the customer, S-P guards the data.

Retirement accounts change the DPP calculus completely. A DPP's main selling points — deductions, passive losses, credits — are worthless inside an IRA because the account already shelters tax, and losses cannot be deducted. Worse, leverage creates unrelated business taxable income: when a tax-exempt entity such as an IRA earns income from a debt-financed business activity, UBIT can make the account itself owe tax. ERISA raises the bar for plan money: fiduciaries must act prudently, follow plan documents, and act solely in participants' interest, with prohibited transaction rules restricting dealings with interested parties. Illiquid DPPs rarely fit a retirement account's liquidity and prudence demands.

Memory hook:Inside an IRA, deductions die and debt creates UBIT.

Rule 2111 and Regulation Best Interest both rest on the investment profile: age, income, net worth, tax status, other holdings, liquidity needs, investment experience, and objectives such as preservation of capital, income, growth, or speculation. The representative must make reasonable efforts to obtain these facts before recommending. For private placements, accreditation is not taken on a checkbox: the firm must verify the investor meets the standard, typically by reviewing documents such as tax returns, financial statements, or confirmation from a lawyer, CPA, or broker. Sophistication is separate from wealth — it measures the investor's knowledge and experience with the risks of programs like these.

Memory hook:Accredited is about money; sophisticated is about knowledge; verify with paper.

Opening an account is a supervised event, not a representative's unilateral decision: the firm's supervisory system under Rules 3110 and 3120 requires designated supervisors to review, approve, and document new accounts. If the account includes a predispute arbitration agreement, FINRA Rule 2268 imposes conditions: the agreement must be in writing, separately signed or acknowledged by the customer, and the customer must be told that arbitration replaces court litigation and be given a fair opportunity to consult counsel. Firms may refuse accounts for legitimate business reasons, such as an inability to supervise or credit concerns, but cannot refuse based on protected characteristics.

Memory hook:Supervisor signs the account; customer separately signs the arbitration clause.

Affordable housing programs trade cash for credits. The economics rest on government tax credits, which offset tax liability dollar for dollar, so a one-dollar credit reduces the tax bill by a full dollar — far more valuable than a one-dollar deduction, which only reduces taxable income. But passive loss limits apply: losses from the program can only offset passive income, not salary or portfolio income. The risks are policy-driven: government subsidies or credits can be reduced or lost, cash distributions are limited during the compliance period, and residual value at the end is uncertain because rents are restricted. The investor is essentially betting on the tax code staying stable.

Memory hook:A credit cuts the tax bill; a deduction only cuts the income.

Development programs buy land or buildings to construct, lease up, and sell — the payoff is appreciation, not current income. Cash flow during the build is thin and partially tax-deferred because passive losses shelter some of it, but the investor is really paying for the upside. The risks cluster around execution: development costs can exceed projections, projected occupancy and rental rates may never be realizable, and long-term mortgage financing may not be available when needed, which can stall or kill the project. Until the property is completed and leased, the investor carries the costs with little or no cash coming back.

Memory hook:Build it, lease it, sell it — if the money holds out.

Operating programs buy buildings with tenants already in place, so income starts on day one. The core metric is net operating income: NOI equals gross rental income minus operating expenses, excluding debt service. Lenders and analysts then test coverage: debt service coverage ratio equals NOI divided by annual debt service, and a ratio below 1 means the property cannot cover its loan payments. The main risks are lease rollover — when major leases expire, rents can drop or space can sit vacant — plus declining occupancy, rising maintenance and replacement costs, and rate increases that squeeze the margin between NOI and debt.

Memory hook:NOI before the mortgage; coverage below one means trouble.

These two programs sit at opposite ends of the risk spectrum. Land development offers pure appreciation — buy raw land, entitle and improve it, sell at a profit — but generates no cash flow while the investor pays carrying costs like taxes, interest, and maintenance, and a delay or failure to develop can wipe out the investment. Mortgage programs are the mirror image: the program lends money secured by real estate and delivers predictable interest income, sometimes with participation in the property's appreciation. The defining risk is default by the borrower, which can interrupt income and force foreclosure on collateral that may be worth less than the loan.

Memory hook:Land carries, mortgages collect — until the borrower stops paying.

Both drilling programs share the up-front tax benefit: intangible drilling costs can be deducted as incurred, sheltering early cash outflows. The difference is geology. Exploratory drilling targets unproven reserves, so dry hole risk is high — a dry well delivers a write-off, not revenue — but a discovery can return multiples of the investment. Development drilling targets proven reserves, so dry holes are far fewer and returns are steadier but lower. Both carry joint and several liability, environmental hazard exposure, changing government regulation, and commodity price swings. The trade-off is always risk and reward: exploratory for the big strike, development for fewer dry holes.

Memory hook:Exploratory gambles on a discovery; development drills where oil is proven.

Income programs buy wells that are already producing, so cash flow is predictable and partially sheltered by depletion, but the risks are overestimation of reserves and commodity pricing. The overriding royalty interest is the cleanest position in oil and gas: the owner holds a cost-free share of production revenue, paid out of the total production of the well or deposit under the lease. Because the ORRI owner pays none of the drilling or operating costs, there are no deductions to claim — the revenue arrives as it comes. That is the trade: no costs, no write-offs, just taxable income from day one.

Memory hook:No costs, no deductions: the royalty owner just collects.

A working interest is the full-risk position: the owner shares in production revenues but also shares the program costs, including drilling, completing, and operating expenses. A reversionary working interest flips the timing. The sponsor contributes no cash up front; instead, investors fund the program, and only after the investors recover their costs — reaching payout — does the reversionary owner begin sharing in revenues. So the question to ask on any structure is who bears the costs and when revenue sharing begins. Working interest owners bear costs from day one; reversionary owners bear none but must wait for payout before any revenue arrives.

Memory hook:Working interest pays to play; reversionary waits for payout.

In a disproportional program, the sponsor pays a lower percentage of total costs in exchange for a higher percentage of revenues. The tax allocation is what the exam tests: normally the investors pay the deductible costs — the intangible drilling costs that generate the up-front write-offs — while the sponsor pays the non-deductible costs. The sponsor may also share in the costs of dry holes, which softens the worst-case outcome for investors. Economically, investors get the deductions and the sponsor gets a larger revenue stream once the program produces. Read any fact pattern for which costs each side pays, because that determines who gets the tax benefits.

Memory hook:Investors buy the deductions; the sponsor buys the revenue.

Equipment leasing programs buy equipment, lease it out, and return partially sheltered cash flow because depreciation offsets part of the rental income. The two signature risks are residual value and phantom income. Residual value risk: when leases end, the program must sell or re-lease the equipment, and used equipment may fetch far less than projected. Phantom income risk: accelerated depreciation reduces the equipment's tax basis, so when it is sold, the taxable gain — including depreciation recapture — can exceed the cash actually distributed, leaving investors owing tax on income they never received. Lease defaults compound both problems by cutting income while costs continue.

Memory hook:Depreciation shrinks basis; the sale taxes what the cash did not cover.

BDCs raise money to lend to or invest in private companies, offering income and modest capital gains, with the risks of borrower defaults, declining income, and falling asset values when interest rates rise. Debt programs share the same profile: predictable income until a borrower stops paying. Section 1031 exchanges defer gain on real estate by swapping like-kind property; the tax basis transfers to the replacement property. Two structures dominate: tenants in common, where each investor holds a fractional deed and lenders face multiple owners, and the Delaware statutory trust, where a trustee holds title and investors hold beneficial interests, a structure designed to fit 1031 requirements.

Memory hook:TIC holds deeds; DST holds beneficial interests under a trustee.

The limited partnership agreement is the program's constitution. It identifies the partners, sets capital contribution obligations, and controls the three questions every investor should ask: how income, losses, and capital gains are allocated; how cash is distributed; and how the general partner is compensated. Allocations must reflect the deal the parties struck, and exam questions often test whether a stated allocation matches the agreement's terms. GP compensation typically combines a management or advisory fee with a share of profits, sometimes a carried interest. Because the GP writes the rules and profits from them, conflicts of interest are built in, and disclosure is the remedy.

Memory hook:The LPA answers three questions: who pays, who gets, who profits.

The general partner runs everything: exclusive power to manage the partnership's business, bind it in contracts, and make investment decisions without LP consent for ordinary operations. In exchange, the GP owes the limited partners fiduciary duty — loyalty and care, acting in the partnership's interest rather than the GP's own. The price of control is unlimited liability: the GP is personally liable for partnership debts and obligations, while the LPs' exposure stops at their capital contributions. That is the core trade: control plus fiduciary duty plus unlimited exposure for the GP; no control and limited liability for the LP. A GP who breaches fiduciary duty answers to the partnership.

Memory hook:The GP controls everything and owes everything — power, duty, exposure.

Limited partners normally have no management voice, but the agreement and safe harbors give them votes on major events: removing or changing the general partner, approving the sale of all or substantially all partnership assets, amending the partnership agreement, and dissolving the partnership. The control rule is the trap: an LP who participates in management can lose limited liability and be treated as a general partner. The safe harbors protect LPs — voting on those enumerated major matters does not, by itself, constitute participation in control. The line is between voting on big structural decisions, which is safe, and running the business, which forfeits the shield.

Memory hook:Vote on the big four; never touch the daily operations.

A limited partnership ends through defined triggers: expiration of its stated term, a vote of the partners, the sale of all the partnership's assets, or the withdrawal of the last general partner. That last one is the exam's favorite: if the final GP withdraws and no replacement steps in, the partnership cannot function — no one exists with authority to manage — so dissolution follows. Liquidation is the wind-down sequence: assets are sold, creditors are paid first, and whatever remains is distributed to the partners per the agreement, typically returning capital contributions before splitting residual value. The order matters: creditors always come before partners in any liquidation.

Memory hook:No general partner, no partnership; creditors eat before partners.

An LLC mirrors a limited partnership — pass-through taxation, limited liability for investors, and an agreement governing allocations and distributions — with two structural differences the exam tests. First, the manager of an LLC has limited liability, unlike the general partner of an LP, whose liability is unlimited. Second, the members can elect to manage the LLC themselves rather than hiring a manager, something LPs cannot do because limited partners cannot manage without risking their liability shield. So the LLC offers flexibility the LP lacks: member-managed or manager-managed, with the same conduit tax treatment either way. When a question turns on who manages and who bears liability, the entity choice decides it.

Memory hook:LLC: manage yourselves and stay protected; LP: only the GP manages.

S corporations and general partnerships both pass income through to owners, but the mechanics differ in ways the exam tests. An S corporation is a domestic corporation with a limited number of shareholders, restricted to individuals, certain estates, trusts, and tax-exempt organizations. It passes income through without entity-level tax, but allocations must be pro rata: each shareholder's share of income and loss follows share ownership, so disproportionate allocations are not permitted. A general partnership gives every partner unlimited liability. The exception worth memorizing: when a general partner is passive rather than active in management, that GP interest is treated as a security under the investment contract test, unlike typical partnership interests.

Memory hook:S corp shares split pro rata; passive GP interests count as securities.

Evaluating a program starts with economic soundness: would the deal work without tax benefits? A program whose returns depend entirely on deductions is fragile, because tax law changes. Next, examine the sponsor's track record, meaning how prior programs actually performed rather than projections, plus the background of management. Then trace the sources of capital: offering proceeds, installment or staged payments, loans, and assessments. Each source carries different risk. Loans add leverage and fixed obligations; assessments can force investors to contribute more money later; staged payments mean assets may be acquired before full funding. A well-structured program clearly documents how much of each dollar reaches the investment.

Memory hook:Sound deal first, sponsor history second, then trace the money: proceeds, installments, loans, assessments.

Organization and offering costs are the money spent to get the program running and sold, and they come out of investor dollars before any asset is bought. The categories include underwriting compensation, due diligence fees, advisory fees, and direct costs such as legal, accounting, and printing. FINRA Rule 2310(b)(4) caps the total: organization and offering expenses may not exceed 15 percent of gross offering proceeds, and when gross proceeds exceed $500,000, the cap drops to 10 percent. The exam often gives a dollar figure of costs and asks whether the program complies, so compute the percentage of gross proceeds and compare it against the right cap.

Memory hook:Fifteen percent normally, ten percent past $500,000, always measured against gross proceeds.

After costs, the use of proceeds section tells you how much of each dollar goes to work: acquisition of assets, fees, and working capital reserves. The higher the ratio of amount available for investment to gross proceeds, the stronger the structure. Returns come in two compositions, current income and capital gains, and should be analyzed both pre-tax and post-tax, since a DPP's appeal often rests on the after-tax number. Liquidity provisions matter because DPP interests have no meaningful secondary market. Look for the anticipated holding period and any redemption program. A program that promises short-term liquidity contradicts the fundamental illiquidity of the underlying asset.

Memory hook:Dollars to assets, returns after tax, liquidity only through redemption or holding period.

A limited partnership is a conduit: the entity itself pays no federal income tax. Instead, it files Form 1065, an informational return, and issues each partner a Schedule K-1 showing that partner's allocated share of ordinary income or loss, capital gains, credits, and deductions. Allocations follow the partnership agreement, which can be disproportionate: one partner may take 90 percent of the losses while another takes 90 percent of the income. Partners report their shares on personal returns whether or not cash was distributed, which is exactly how phantom income arises: a taxable allocation arrives without a check to pay the tax on it.

Memory hook:Form 1065 informs, K-1 allocates, partner pays, cash or no cash.

Passive activity loss rules limit how DPP losses are used. A passive loss can offset only passive income, meaning income from other passive activities such as other DPPs or rental real estate in which the investor does not materially participate. It cannot offset wages, interest, dividends, or capital gains. If passive losses exceed passive income, the excess is suspended and carried forward to future years, where it offsets future passive income; it is never carried back. The full suspended amount is finally released when the investor disposes of the entire passive interest in a fully taxable transaction.

Memory hook:Passive pairs with passive; suspended losses roll forward, never backward.

A credit and a deduction of the same dollar are not worth the same. A credit reduces tax liability dollar for dollar, so a $1,000 credit saves $1,000. A deduction reduces taxable income, so its value equals the deduction multiplied by the investor's marginal tax rate: a $1,000 deduction saves perhaps $240 for someone in a 24 percent bracket. Credits are worth more. Separately, investment interest expense, meaning interest paid to carry investment property, is deductible only up to net investment income, and any excess is carried forward. Interest incurred to buy or carry tax-exempt securities is never deductible at all.

Memory hook:Credit cuts the tax bill, deduction cuts the income, investment interest stops at investment income.

Depreciation, depletion, and amortization are noncash deductions: the entity deducts a portion of an asset's cost each year without writing a check, which is why DPP cash distributions can be partly sheltered from current tax. The method varies by asset: straight-line or accelerated depreciation for buildings and equipment, cost depletion for oil and gas reserves, and amortization for intangibles such as lease acquisition costs. The trade-off is the alternative minimum tax. Accelerated depreciation and certain depletion amounts are AMT preference items, so a program that front-loads deductions can shelter regular tax yet trigger AMT, erasing much of the intended benefit.

Memory hook:Noncash deductions shelter cash flow, but front-loaded ones feed the AMT.

The at-risk rules cap deductible losses at the amount the investor could actually lose. A partner's at-risk amount starts with capital contributions plus a share of entity liabilities for which the partner is personally liable. Nonrecourse debt generally does not increase at-risk basis because no one stands behind it. The major exception: qualified nonrecourse financing on real estate is exempt from the at-risk limitation, so it does increase the amount at risk. Remember the layering: the at-risk limit applies first to determine how much loss is allowable, and the passive loss rules then determine when that allowable loss can actually be deducted.

Memory hook:At risk equals money in plus liabilities you stand behind; qualified nonrecourse real estate debt counts.

Adjusted basis is the partner's tax scoreboard. It starts at the capital contribution, increases with allocated income and additional contributions, and decreases with allocated losses and distributions. The formula on sale: gain or loss equals amount realized minus adjusted basis. Two consequences the exam loves: a distribution exceeding basis creates taxable gain, and losses can drive basis to zero; beyond that, further losses are suspended until basis is restored by future income or contributions. This is why a partner can receive cash distributions for years, watch basis shrink, and owe a surprisingly large gain on final sale or liquidation of the interest.

Memory hook:Basis rises with income in, falls with losses and cash out; gain equals price minus adjusted basis.

Section 1031 lets an investor swap like-kind real property held for business or investment without recognizing gain currently. This is deferral, not exemption: the gain is postponed, and the tax basis of the relinquished property carries over to the replacement property, reduced by any boot received and increased by boot paid. Boot, meaning cash or non-like-kind property received, triggers gain recognition to that extent. Phantom income can appear when the exchange is structured so the investor receives taxable value without corresponding cash. Because basis carries over, the deferred gain stays embedded in the new property and will surface on its eventual sale.

Memory hook:Swap till you drop, but basis rides along and boot is taxed today.

Regulation Best Interest, SEC Rule 15l-1, governs broker-dealer recommendations of securities and account types to retail customers. It imposes four obligations: disclosure, care, conflicts of interest, and compliance, and it requires delivery of Form CRS, a plain-English relationship summary. FINRA Rule 2111 covers suitability with three prongs: reasonable-basis, meaning the product is suitable for someone; customer-specific, meaning suitable for this investor's profile; and quantitative, guarding against excessive trading. The standards overlap but differ in thrust. Reg BI demands that the recommendation be in the customer's best interest with conflicts disclosed or mitigated, while Rule 2111 demands reasonableness. Both require understanding the product before recommending it.

Memory hook:Reg BI: disclose, care, conflicts, compliance, plus Form CRS; 2111: reasonable, customer-specific, quantitative.

DPP suitability runs on two tracks. Reasonable-basis suitability requires the representative to investigate the program itself, understand the illiquidity, the long holding period, the tax complexity, and the sponsor, and conclude it is suitable for some investors. Customer-specific suitability then matches the program to this investor: liquidity needs, existing portfolio composition and concentration, net worth, income, tax status, and objectives. DPPs are illiquid, so an investor who may need the money soon fails the test regardless of net worth. Concentration is the other red flag: putting a large share of a portfolio into any single DPP is hard to defend, even for a wealthy accredited investor.

Memory hook:First ask if the deal suits anyone, then whether it suits this wallet, timeline, and portfolio.

FINRA Rule 5110 requires that underwriting terms and arrangements be fair and reasonable, and it reaches every form of compensation. Cash compensation includes commissions, fees, and expense reimbursements. Non-cash compensation includes securities of the issuer, warrants, options, and similar items. Indeterminate compensation is the category most tested: arrangements whose value cannot be fixed at the time of the offering, such as carried interest in the sponsor's future profits, continuing compensation, or rights to acquire other securities. All of it must be disclosed and is subject to FINRA review in connection with public offerings. The exam expects you to classify a described payment into the correct bucket.

Memory hook:Cash is money, non-cash is securities, indeterminate is a future slice like carried interest.

Two rules, two roles. Rule 5122 applies when the securities are issued by the member itself or by a control affiliate of the member; the member must file the offering documents with FINRA and disclose its role and compensation. Rule 5123 applies when a member sells another issuer's private placement; the member files a notice with FINRA within 15 calendar days of first sale. Both rules carry exemptions, including offerings sold solely to qualified purchasers or institutional accounts, and certain offerings to knowledgeable employees. The distinction the exam tests is which rule attached: the member's own deal points to 5122, while distributing someone else's deal points to 5123 and its 15-day filing window.

Memory hook:5122 is your own deal; 5123 is someone else's deal, with notice filed within 15 days.

FINRA Rule 2165 protects specified adults: anyone 65 or older, or 18 and older with a mental or physical impairment that prevents protecting their own interests. The rule permits a temporary hold on disbursements of funds or securities, not on trading, when the firm reasonably believes exploitation is occurring, with supervisory approval. The initial hold runs up to 15 business days and may be extended up to 10 more. Firms must also make reasonable efforts to obtain the name of a trusted contact for specified adult accounts, and contacting that person about suspected exploitation does not violate privacy obligations. The hold is permissive, not mandatory.

Memory hook:2165: hold the money, not the trades; 15 days plus 10, and call the trusted contact.

Ongoing communication obligations keep investors informed after the closing. Tax information arrives on Schedule K-1 annually, often not until spring, which can force investors to extend their returns, so reps should set that expectation at sale. Firms must disclose the sources of cash distributions: operating income, return of capital, or proceeds of borrowing. The distinction matters because a distribution funded by borrowing or by returning the investor's own money is not investment income. Valuation of privately held program assets depends on appraisals rather than market quotes. Finally, books and records requirements under FINRA Rule 4510 and Exchange Act Section 17 govern what member firms must make and retain, including confirmations, account statements, and complaint files.

Memory hook:K-1 comes late; ask where the cash came from: earnings, capital, or a loan.

In a best efforts offering, Rule 15c2-4 bars the broker-dealer from transmitting investor funds to the issuer until escrow conditions are satisfied, typically a stated minimum dollar amount raised within a set time, and Rule 10b-9 governs what may be represented about reaching the minimum. Installment purchases are restricted: they are permitted in SEC-registered public offerings, subject to conditions, but not in private placements. Volume discounts, meaning lower prices per unit for larger purchases, are allowed only when the same discount schedule is available to all investors on equal terms and the schedule is disclosed. The exam tests both the escrow trigger and who may claim a price break.

Memory hook:Escrow until the minimum, installments only in registered deals, discounts for everyone or no one.

Two confirmation rules govern DPP transactions. SEC Rule 10b-10 requires a broker-dealer to send a confirmation at or before completion of the transaction, disclosing the security, price, commission, settlement date, and whether the firm acted as agent or principal. FINRA Rule 2232 layers on DPP-specific content, including the fact that the transaction involves a direct participation program and required details about the program interest. Recordkeeping runs through Exchange Act Section 17: Rule 17a-3 specifies the records a firm must make, such as blotters and account statements, and 17a-4 sets how long they must be preserved. Confirmations themselves are records under this framework.

Memory hook:10b-10 confirms at or before completion; 2232 adds DPP details; Section 17 keeps the files.

Written customer complaints trigger a chain of obligations. FINRA Rule 4513 requires the firm to keep records of written customer complaints, and Rule 4530 requires reporting specified events to FINRA, including qualifying sales practice complaints. Resolution runs through three formal paths: arbitration, where arbitrators hear evidence and issue a binding award; mediation, where a neutral facilitates negotiation but the outcome is not binding; and litigation in court. Arbitration awards face very limited grounds for appeal. Separately, certain customer complaints must be reported on the registered person's Form U4, typically written complaints alleging misrepresentation, fraud, or similar sales practice violations, which is why mishandled complaints follow the rep for a career.

Memory hook:4513 keeps the complaint file, 4530 tells FINRA, arbitration binds, mediation persuades, U4 follows the rep.