Series 22 Cheatsheet — DPP Structures, Due Diligence, Risks & Tax Concepts

Series 22 is “alternatives + process.” The best answer is usually the one that is most suitable/best interest, properly disclosed, and documented, with escalation when needed.

Exam map (where points come from)

Series 22 at a glance (FINRA)

• Items: 50 scored + 5 unscored (55 total)
• Time: 1 hour 30 minutes (90 minutes)
• Passing score: 70 (scaled)

Job functions and weights

Study reality: most Series 22 misses are either (a) misunderstanding DPP structure/liquidity, (b) not recognizing the due diligence/disclosure step, or (c) confusing basic tax concepts (K-1, basis, passive losses).

Series 22 “best answer” checklist (use on every scenario)

1. Who is the investor? objective, horizon, liquidity needs, net worth/income, tax status, experience
2. What is the product? DPP type + structure (LP/LLC/DST/TIC), registered vs private placement
3. What are the primary risks? illiquidity, leverage/financing, sponsor risk, valuation opacity, tax complexity
4. What are the real costs/conflicts? offering expenses, ongoing fees, compensation, “indeterminate” comp
5. What must be delivered/disclosed? offering docs, risk factors, fees/use of proceeds, liquidity limits, tax reporting expectations
6. What is the compliant next step? gather missing profile facts, disclose/document, obtain approvals, escalate or refuse

Direct participation programs (DPPs) — what you’re selling

• DPP: pooled investment where investors directly participate in program results (often via LP or LLC interests).
• DPPs are usually illiquid (limited or no secondary market) and are commonly intended for longer holding periods.
• DPPs can have complex economics: returns may come from cash distributions, tax effects, and eventual sale/liquidation.
• Many DPPs are sold as private placements, but some are registered; the exam tests the “process + risk + disclosure” mindset in both cases.

Typical investor risks (high-yield list):

• Illiquidity and long holding periods
• Leverage/financing risk (debt service, refinancing, covenant risk)
• Sponsor/management risk (track record, conflicts, fees)
• Valuation opacity (non-traded valuations can be estimates)
• Tax complexity (K-1 timing, passive loss limits, basis, at-risk rules, AMT exposure)

Offering types and selling roles (F1)

Offering types (Series 22 level)

• Registered offering: sold with required disclosures (prospectus-level documents).
• Exempt/unregistered offering (e.g., Reg D): still requires fair disclosure, suitability/best interest analysis, and firm due diligence.

Selling ecosystem vocabulary

• Sponsor/issuer: organizes the program; typically controls assets and economics.
• Dealer-manager: coordinates distribution; may manage due diligence process and dealer agreements.
• Selling group members: firms distributing the offering under agreement.
• Wholesaler: supports distribution (education/marketing) within firm controls.
• Finder: can introduce parties, but compensation and registration rules create “prohibited practice” traps if handled improperly.

Communications with the public (high yield)

• Avoid promissory language (“guaranteed,” “risk-free,” “certain tax shelter”).
• Be fair and balanced: risks and liquidity limits must be as clear as benefits.
• Don’t contradict the offering documents; if asked “what must you do?” the best answer often includes deliver/point to offering docs and document.

DPP program types and risk patterns (F3)

Real estate programs

Common subtypes (each has a different risk pattern):

• Affordable housing: can involve tax credits; risks include policy/subsidy changes, limited cash distributions, uncertain residual value.
• Development properties: higher project risk (cost overruns, delays, financing); cash flow may be limited early.
• Operating properties: cash flow tied to leases/NOI; risks include vacancy/rent declines, capex/maintenance, inability to cover debt service.
• Land development: appreciation-driven; risks include long timelines and carrying costs with no cash flow.
• Mortgage programs: income-focused; risks include borrower default and credit/market risk.

Oil and gas programs

Common subtypes:

• Exploratory: highest uncertainty (“dry holes”), commodity price risk, regulatory/environmental risk.
• Development: fewer “dry holes” than exploratory but still commodity/operational risk.
• Income: more predictable cash flow (relative), but reserve estimates and commodity prices still drive outcomes.

Common interest types:

• Overriding royalty interest: investor shares in revenues and does not share program costs (structure-specific).
• Working interest: investor shares in revenues and shares program costs.
• Reversionary working interest: investor shares in revenues after investors recover costs (structure-specific).
• Disproportional sharing arrangement: sponsor pays a lower % of costs in return for a higher % of revenues; can change incentive alignment and risk.

Equipment leasing programs

• Potential benefit: partially sheltered cash flow.
• Key risks: lease defaults, uncertain residual value, and potential phantom income when equipment is sold (fact pattern driven).

BDCs and other debt investment programs (high level)

• Potential benefit: income, modest capital gains.
• Key risks: borrower defaults/declining income, declining asset values and rate sensitivity.

Other program categories (recognize the name + the key risk theme)

• agricultural / livestock
• entertainment
• R&D / venture capital
• commodity pools

Exam pattern: when the program is “specialty,” the correct answer often emphasizes risk, illiquidity, diversification, and suitability constraints.

Like-kind exchange structures (high level)

• Section 1031: conceptually defers gain on qualifying real estate exchanges (rules are detailed; exam questions are typically high level).
• Structures commonly referenced: TIC and DST (see “Entity structures” and “Tax concepts”).

Entity structures and investor rights (F3)

Quick structure comparison (test-friendly)

Limited partnership roles (high yield)

• General partner (GP): manages the partnership; fiduciary responsibilities; typically has broad authority.
• Limited partner (LP): limited voting rights; liability generally limited to capital contribution; limited transferability is common.

Limited partner voting topics that appear in questions (high level):

• approving sale of all/substantially all partnership assets
• approving amendments to partnership agreement
• voting on replacing/adding general partner (structure dependent)

Dissolution/liquidation triggers (high level):

• withdrawal of last general partner
• vote of partners
• sale of all assets
• partnership expiration

Why the exam cares about structure

Structure drives:

• who controls decisions and conflicts
• how cash distributions work (and whether distributions can be return of capital)
• how tax items are allocated and reported (K-1 for partnerships)
• how hard it is to exit (transfer restrictions, limited redemption programs)

How to evaluate a DPP offering (economic soundness checklist)

Use this as a “read the offering like a professional” checklist.

Program objective vs investor objective

• Is the program trying to deliver income, growth/appreciation, tax benefits, or diversification?
• Does that match the investor’s objective and horizon?

Sponsor and management

• sponsor track record and prior programs
• experience with asset type (real estate, O&G, leasing, credit)
• conflicts of interest and incentives

Assets and valuation

• what assets are being acquired and at what valuation basis?
• key risk factors (market, operational, regulatory)
• how and when valuations are reported (public vs private/non-traded)

Capital structure and sources of funds

• offering proceeds
• loans/leverage (and refinancing risk)
• staged payments/assessments (and the risk of additional capital calls)

Use of proceeds and “how much gets invested”

• organizational and offering costs (upfront “drag”)
• amount available for investment vs paid to fees/expenses
• ongoing fees (management, acquisition/disposition, advisory)

Returns and cash distributions

• expected return composition (cash vs appreciation; pre-tax vs post-tax)
• distribution policy and sustainability
• source of distributions (operations vs borrowing vs return of capital)

Liquidity and exit

• anticipated holding period
• redemption programs (if any) and their limits
• secondary market expectations (often limited)

Red flags that frequently drive “best answer”

• investor needs short-term liquidity but the product is illiquid
• concentration risk (overexposure to one program/asset type)
• unrealistic expectations (“guaranteed income,” “risk-free shelter”)
• high or unclear fees/compensation and conflicts not addressed
• investor cannot explain risks or does not understand K-1/tax timing

Due diligence and what to review (F1/F3 process)

Series 22 often tests that you know what must be checked, not that you can recite every rule.

Due diligence review buckets (high level):

• offering documents: material statements, risk factors, conflicts, use of proceeds
• registration/exemption compliance (registered vs exempt)
• financial data and assets (and valuation assumptions)
• management background and prior performance
• projections/forecasts assumptions (if presented)
• fees and underwriting terms/arrangements
• opinion of tax counsel (when applicable)

Fees, compensation, and conflicts (Series 22 “trap” zone)

Think in three layers:

1. Organizational and offering expenses (upfront; reduce investable capital)
2. Ongoing program fees (drag on performance over time)
3. Sales compensation (cash, non-cash, and sometimes indeterminate)

Compensation themes that show up in questions:

• cash vs non-cash comp
• indeterminate/ongoing comp (e.g., carried interest, continuing compensation)
• limits/controls on compensation in public offerings (high level)

“Best answer” disclosure framing:

• disclose total costs/fees and what they pay for
• disclose conflicts and who benefits (sponsor, GP, dealer-manager, selling firm)
• document why the product is suitable/best interest despite fees/illiquidity

Tax concepts for DPPs (high yield, fact-pattern driven)

This section is exam-friendly and conceptual; real tax law is deeper.

Pass-through taxation and K-1 mindset

• DPPs are often pass-through entities: profits/losses and certain items flow to investors.
• Partnerships typically file IRS Form 1065 (informational return).
• Investors often receive a Schedule K-1 reporting allocations.

Key trap: investors can receive taxable income allocations even without matching cash distributions.

Adjusted tax basis (why it matters)

Basis affects:

• taxable gain/loss on sale
• ability to deduct certain losses (fact pattern + rules)

Exam-friendly intuition:

$$ \text{Ending Basis} \approx \text{Beginning Basis} + \text{Contributions} + \text{Allocated Income} - \text{Distributions} - \text{Allocated Losses} $$

Passive activity rules (high level)

• passive losses generally offset passive income
• unused passive losses can be carried forward (not back) (conceptual)

Tax credits vs deductions

• credit: reduces tax liability
• deduction: reduces taxable income

Depreciation, depletion, amortization (concept)

Noncash deductions can partially shelter cash flow:

• depreciation: cost recovery for tangible assets
• depletion: cost recovery for natural resources (e.g., oil and gas)
• amortization: cost recovery for certain intangibles or costs

Phantom income

Phantom income: taxable income without associated cash distributions (can happen in DPPs).

At-risk limitations (high level)

Loss deductions can be limited to the amount the investor has “at risk.”

• commonly tied to capital contribution plus certain liabilities
• qualified nonrecourse financing in real estate may have special treatment (high level)

Like-kind exchanges (Section 1031) (high level)

• can defer gain on qualifying exchanges; basis is transferred (conceptual)
• does not eliminate investment risk; product structure/liquidity still matter

AMT (high level)

Certain DPP preference items can trigger AMT exposure (fact pattern driven).

Suitability and Reg BI for DPPs (F2/F3)

DPP suitability drivers (Series 22 focus)

• liquidity needs: DPPs can be a bad fit for near-term cash needs
• time horizon: long holding periods are common
• net worth and income: higher-risk, illiquid alternatives require capacity to bear loss
• risk tolerance and experience: investor must be able to understand risks and complexity
• tax status: DPP tax features can be unsuitable or misunderstood depending on the customer’s situation
• concentration/diversification: avoid overconcentration in one program or asset type

Accreditation and sophistication (high level)

Some offerings require verifying investor accreditation and sophistication. If the scenario implies this, the “best answer” often includes:

• verify status per firm procedure
• document the basis for eligibility

“Process” decision flow (what Series 22 wants)

    flowchart TD
	  A["Customer asks about a DPP"] --> B{Do we have a complete profile?}
	  B -->|"No"| C["Gather facts: objective, horizon, liquidity, tax, net worth/income, experience"]
	  B -->|"Yes"| D{Is this a recommendation?}
	  D -->|"No"| E["Provide factual info; do not mislead; follow firm controls"]
	  D -->|"Yes"| F["Evaluate fit: risks, costs, illiquidity, alternatives"]
	  F --> G{Any missing disclosures / red flags?}
	  G -->|"Yes"| H["Disclose + document + obtain approvals; escalate or refuse if required"]
	  G -->|"No"| I["Proceed with documented best-interest rationale"]

Subscription processing, escrow, and confirmations (F4 clean points)

Subscription workflow (what happens)

    flowchart TD
	  A["Customer signs subscription agreement"] --> B["Funding received (check/wire)"]
	  B --> C["Escrow / handling per offering rules"]
	  C --> D["Issuer accepts or rejects subscriber"]
	  D -->|"Accepted"| E["Confirmations + records + ongoing disclosures"]
	  D -->|"Rejected"| F["Funds returned per procedures"]

Remember: in many offerings, the sale is not final until the issuer accepts the subscription (fact pattern will signal).

Installment and pricing concepts (high level)

• Installment procedures can exist; restrictions can apply to SEC registered public offerings (fact pattern driven).
• Offerings can have different share/unit classes; understand how class pricing and volume discounts affect economics and disclosures.

Escrow and safeguarding customer funds (high level)

• Customer funds in underwritings are subject to specific handling/escrow rules (exam tests the “protect investor funds” theme).
• Do not represent an offering as successful/complete if it’s contingent on conditions or minimums (fact pattern driven).

Records, statements, and complaint handling (paperwork points)

• DPP tax reporting has timing; investors may receive K-1 information after year-end (high level).
• Account statements may show estimated values for non-traded products; valuation disclosure matters.
• Written complaints must be captured, retained, and escalated per firm procedure.
• Disputes are commonly resolved through arbitration (high level).

Glossary (Series 22 terms, fast definitions)

• 1031 exchange: like-kind exchange concept for qualifying real estate that can defer gain (high level).
• 1065: IRS partnership informational return (high level).
• Accredited investor: investor meeting defined financial criteria; some offerings require verification (conceptual).
• AMT: alternative minimum tax; certain items can trigger it (high level).
• At-risk rule: limits loss deductions to amounts the investor has at risk (high level).
• Basis: tax basis used to compute gain/loss and certain loss deductibility (high level).
• BDCs: business development companies; invest in debt/equity of smaller companies; credit/rate/valuation risk themes.
• Carried interest: form of sponsor/manager compensation tied to performance; creates conflicts and “indeterminate comp” themes.
• Commodity pool: pooled investment in commodities/futures strategies; complex and risky (conceptual).
• Dealer-manager: firm coordinating distribution of a DPP offering; may lead due diligence and manage selling group relationships.
• Depreciation: noncash cost recovery for certain assets; can shelter taxable income.
• Depletion: noncash cost recovery for natural resources (e.g., oil and gas) (conceptual).
• Direct participation program (DPP): pooled program where investors participate directly in results, often via LP/LLC interests.
• Disproportional sharing arrangement: sponsor pays a lower % of costs in return for a higher % of revenues; changes incentives and risks.
• Dissolution/liquidation: winding down the partnership/program; can occur by term, vote, sale of assets, or GP withdrawal (high level).
• Distribution source: whether distributions come from operations vs borrowing vs return of capital (high-yield disclosure theme).
• Escrow: holding customer funds pending offering conditions/acceptance; tested as “protect investor funds.”
• Finder: party who introduces potential investors/transactions; compensation and registration rules create compliance traps.
• General partner (GP): managing partner in an LP; has management authority and duties (liability depends on structure).
• Illiquidity: inability to sell readily at a fair price; core risk of DPPs.
• K-1: schedule reporting a partner’s allocations of income/loss/deductions/credits.
• Limited partner (LP): investor with limited voting rights and limited liability; often faces transfer restrictions.
• LLC: limited liability company; can have pass-through taxation; governance varies.
• Net operating income (NOI): real estate operating income after expenses; used in evaluating operating properties (conceptual).
• Offering expenses: costs of raising capital (organizational + offering costs) that reduce investable proceeds.
• Overriding royalty interest (ORRI): oil and gas interest sharing in revenues without sharing program costs (conceptual).
• Passive activity: activity subject to passive loss rules; losses generally offset passive income (conceptual).
• Phantom income: taxable income without matching cash distribution.
• Private placement: offering sold under an exemption from registration (e.g., Regulation D) (high level).
• Prospectus / offering documents: primary disclosures for the offering; delivery and consistency with communications are frequently tested.
• Redemption program: issuer program to repurchase interests; often limited and not guaranteed.
• Schedule of distributions: stated plan for distributions; must be evaluated for sustainability and source.
• Sponsor: entity organizing the program; often earns fees and can have conflicts.
• Suitability: requirement that recommendations fit the customer’s profile; DPP liquidity and complexity are key constraints.
• Tax credit: reduces tax liability; distinct from deductions.
• Tax deduction: reduces taxable income.
• TIC: tenants in common; a real estate holding structure sometimes associated with 1031 arrangements (high level).
• Underwriting compensation: compensation to selling firms; can be cash, non-cash, or indeterminate; must be disclosed and controlled.
• Unit class: different share/unit classes in an offering; pricing/fees and discounts can vary.
• Valuation opacity: uncertainty about fair value in non-traded products; reported values may be estimates.
• Wholesaler: distribution support role; communications must remain compliant and within firm controls.
• Working interest: oil and gas interest sharing in revenues and costs; typically higher risk exposure than royalty structures.