Series 22: DPP Business Development

Series 22 DPP Business Development questions help you isolate one part of the FINRA outline before returning to a mixed practice test. The questions below are original Securities Prep practice items aligned to this topic and are not copied from any exam sponsor.

Topic snapshot

Sample questions

Question 1

A DPP representative is comparing two offerings for a customer who cares primarily about how much of a $50,000 subscription is initially available to purchase program assets.

Exhibit: Selected use of proceeds (as % of gross offering proceeds)

Based on the exhibit, which statement best describes the impact on investor economics at inception?

• A. Program A invests more initially because the acquisition fee is paid later.
• B. Program A invests more initially because disposition fees reduce net proceeds.
• C. Program B invests more initially because it has no acquisition fee.
• D. Both programs invest the same initially because their loads are identical.

Best answer: C

Explanation: An acquisition fee is taken from offering proceeds at purchase, reducing initial dollars deployed into assets.

Up-front costs and any acquisition fees reduce the amount of subscription proceeds available to buy assets at inception. Here, both programs have the same 10% front-end offering costs, but Program A also pays a 3% acquisition fee from proceeds when assets are purchased. Program B therefore has more money initially deployed into program assets.

When reviewing a DPP’s economics, focus on how the use of proceeds allocates investor dollars between (1) up-front selling and offering expenses and (2) program-level fees paid from proceeds, such as acquisition fees. Even if two programs have the same front-end load, an acquisition fee paid to the sponsor at the time assets are purchased further reduces the amount initially invested in assets.

In the exhibit, both programs start with 10% deducted for selling and offering expenses. Program A then pays an additional 3% acquisition fee from proceeds, leaving less capital to acquire assets at inception. Program B has no acquisition fee, so more of the subscription proceeds are initially available to purchase equipment; its disposition fee affects economics later, at sale, not at inception.

• Timing confusion: An acquisition fee impacts inception because it is paid when assets are bought.
• Ignoring use of proceeds: Equal front-end loads do not mean equal initial asset investment if other proceeds-funded fees differ.
• Mixing inception vs. exit: A disposition fee is an exit cost and doesn’t reduce initial dollars deployed.

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Question 2

A broker-dealer sells interests in a private real estate DPP after relying mainly on the sponsor’s sales deck and does not independently review the PPM’s use of proceeds, fee/conflict disclosures, or the sponsor’s financial condition.

Which consequence best matches inaccurate or incomplete due diligence in this situation?

• A. Customer losses and FINRA enforcement for inadequate due diligence
• B. Elimination of leverage risk because the program is privately offered
• C. Automatic suitability safe harbor if the PPM was delivered
• D. Guaranteed secondary-market liquidity due to DPP pass-through taxation

Best answer: A

Explanation: Selling a DPP without a reasonable investigation can harm customers and expose the firm to regulatory action and restitution.

Incomplete due diligence can lead to selling a DPP with undisclosed or misunderstood risks, conflicts, or weak sponsor/financial assumptions, increasing the likelihood of investor harm. Regulators expect a broker-dealer to have a reasonable basis for recommending and distributing a DPP, supported by an independent investigation. Failure can result in enforcement actions and customer restitution or rescission-related exposure.

For DPPs, a broker-dealer is expected to conduct a reasonable, independent review of the offering and sponsor—not simply rely on marketing materials. If key items like use of proceeds, fees/conflicts, and sponsor financial condition are not reviewed or are misunderstood, the firm may recommend or sell an unsuitable or materially riskier program than customers were led to believe. The practical consequence is twofold: (1) customers can be harmed through unexpected losses, illiquidity, or misaligned economics, and (2) the firm and associated persons face regulatory exposure for deficient due diligence, including sanctions, heightened supervision, and restitution/rescission-style remedies where applicable. The key takeaway is that weak due diligence creates both investor-harm risk and compliance/enforcement risk.

• PPM delivery isn’t a shield because disclosure delivery does not replace independent investigation.
• Private offering doesn’t reduce risk because leverage and program risks can still be significant.
• Pass-through taxation doesn’t create liquidity because tax treatment doesn’t ensure a secondary market.

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Question 3

Which statement is most accurate about when a communication becomes an offer and why that matters for direct participation program (DPP) offerings?

• A. A communication that promotes a specific DPP and solicits investor interest can be treated as an offer; that triggers prospectus-delivery constraints in registered offerings and can jeopardize an exempt offering if it amounts to general solicitation.
• B. General advertising is acceptable in an exempt DPP offering as long as no subscriptions are accepted.
• C. A communication becomes an offer only when the investor signs the subscription agreement and sends funds.
• D. A communication is an offer only if it is labeled “prospectus” or “private placement memorandum.”

Best answer: A

Explanation: Promotional communications that condition the market are treated as offers, affecting prospectus delivery in registered deals and the availability of an exemption in private placements.

In securities offerings, communications can be deemed “offers” even if no money is requested, particularly when they promote a specific deal and condition the market. Once treated as an offer, the communication must fit within the permitted framework for that offering type—registered offerings are tied to prospectus delivery rules, while exempt offerings can lose their exemption if the communication is general solicitation.

An “offer” is broader than asking for money; it can include written or oral communications that promote a particular DPP and are designed to arouse interest (often called conditioning the market). When a communication is considered an offer, the compliance consequences depend on the offering type:

• Registered offerings: offering communications must be consistent with the registration process and prospectus delivery requirements.
• Exempt (private) offerings: broadly disseminated promotional communications may be viewed as general solicitation/advertising and can threaten the availability of the exemption.

The key practical point is that the same marketing piece can be permissible or problematic depending on whether the DPP is registered or being sold under an exemption.

• Label isn’t controlling: whether something is an offer depends on content and intent, not the document title.
• “No subscriptions” isn’t a safe harbor: general public promotion can still be problematic for an exempt offering.
• Offer before money: an offer can occur well before any subscription agreement is signed or funds are sent.

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Question 4

A DPP representative is drafting an approved email explaining share class pricing and volume discounts for a real estate DPP using the following excerpt from the offering materials (all amounts USD; round to nearest dollar).

Exhibit (upfront fees deducted at purchase):

• Class A: 7.0% upfront sales charge for purchases under $200,000; 5.0% for purchases of $200,000 or more (published breakpoint)
• Class I: 1.0% upfront offering fee (no breakpoint)

The rep wants to illustrate a $250,000 purchase example without implying preferential treatment or hidden fees. Which statement is MOST appropriate to include?

• A. Class I has no upfront costs, so the full $250,000 is invested; Class A deducts 7% ($17,500), so $232,500 is invested.
• B. For select clients, we can waive the Class A sales charge so the full $250,000 is invested.
• C. At $250,000, the published breakpoint reduces Class A to 5% ($12,500), so $237,500 is invested; Class I deducts 1% ($2,500), so $247,500 is invested; these schedules apply uniformly and are disclosed.
• D. At $250,000, Class A qualifies for a 2% volume discount ($5,000), so $245,000 is invested; Class I invests $247,500 after its 1% fee.

Best answer: C

Explanation: It correctly applies the breakpoint math and describes pricing as a disclosed, uniformly available schedule rather than a special deal.

Volume discounts should be described as published breakpoints available to any investor who meets the stated purchase level, not as special treatment. Using the exhibit, a $250,000 Class A purchase uses the 5% breakpoint ($12,500), leaving $237,500 invested, while Class I deducts 1% ($2,500), leaving $247,500 invested. Clear fee descriptions help avoid implying hidden charges or preferential pricing.

Communications about DPP share classes and volume discounts should tie pricing to the offering’s disclosed schedule and avoid implying that certain customers receive undisclosed “special deals” or that a class has no costs when it has an upfront fee.

Using the exhibit for a $250,000 purchase:

\[ \begin{aligned} \text{Class A net} &= 250{,}000 \times (1-0.05)=237{,}500\\ \text{Class I net} &= 250{,}000 \times (1-0.01)=247{,}500 \end{aligned} \]

A compliant description (1) applies the breakpoint correctly, (2) states the fee schedule is published/available based on purchase size, and (3) makes clear that different share classes can have different disclosed fees rather than hidden charges.

• “We can waive it” suggests undisclosed preferential treatment and is not tied to the published schedule.
• Wrong breakpoint math misstates the fee rate and therefore the investable proceeds.
• “No upfront costs” is inaccurate when the class has a stated 1% upfront fee, and it also misapplies the Class A breakpoint.

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Question 5

A DPP representative is completing the broker-dealer’s due diligence checklist before the firm will approve sales of a non-traded REIT. The rep has reviewed the sponsor’s background and the property strategy, and now is analyzing investor economics using the PPM’s fee table.

Exhibit: PPM excerpt — Use of proceeds (per $100,000 subscription)

• Selling commission: 10.0%
• Dealer manager fee: 3.0%
• Organization and offering expenses: 2.0%
• Acquisition fee (paid to sponsor affiliate): 2.0%
• Amount available for investments: 83.0%

What is the best next step in the due diligence process before the product can be presented to customers?

• A. Document and escalate the net-invested impact of the fees for approval
• B. Begin soliciting indications of interest since the PPM is available
• C. Rely on the sponsor’s distribution projections without adjusting for fees
• D. Proceed to collect subscription agreements and forward checks to escrow

Best answer: A

Explanation: The firm must evaluate and document how upfront fees reduce investable proceeds (e.g., only 83% invested) and route that analysis for supervisory/product-approval review before sales.

Due diligence includes assessing investor economics, including how offering and sponsor fees affect the amount of capital actually deployed into assets. The PPM excerpt shows that 17% of the subscription is consumed by upfront fees, leaving 83% available for investments. The appropriate next step is to document that impact and route it through the firm’s supervisory/product-approval process before any sales activity.

In DPP offering review, a key due diligence task is to analyze fees and use of proceeds to understand how much of an investor’s money is actually invested versus paid out in selling compensation, offering expenses, and sponsor/affiliate fees. Here, the exhibit shows that for each $100,000 subscription, only 83% is available for investments, which can materially affect break-even and cash available to generate distributions.

The proper workflow step is to capture this “net invested” impact in the due diligence file (often as part of a product review memo/checklist), evaluate whether it is reasonable given the strategy and projected returns, and submit it for the firm’s supervisory/product-approval review before the offering is marketed or subscriptions are accepted. The key takeaway is that fee/use-of-proceeds analysis is a prerequisite to approval—not something discovered after soliciting investors.

• Premature solicitation is not appropriate before the firm completes product approval based on due diligence findings.
• Ignoring fee impact is improper because projections should be evaluated in light of reduced investable proceeds and total program costs.
• Premature subscription processing skips the firm’s approval step and can create issues if the product is not approved or disclosures need to be enhanced.

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Question 6

A broker-dealer is part of the selling group for an equipment-leasing limited partnership that is described in the PPM as illiquid for 8–10 years, with no redemption program and K-1 tax reporting. The selling agreement provides an additional 1% selling concession for reps who reach a monthly sales target, and the offering is nearly sold out so the firm must allocate remaining units among incoming subscriptions. A rep submits subscriptions that concentrate most of the remaining units in two retirees who disclosed a likely need for cash within 2–3 years and are being encouraged to switch out of an existing illiquid DPP.

As the supervisor, what is the BEST action to reduce the risk of unsuitable sales and churning while handling the allocation?

• A. Ban switching from any DPP into the offering to eliminate churning risk, regardless of customer circumstances
• B. Require principal pre-approval of the allocation and any switch, with documentation of customer-specific suitability and surveillance for incentive-driven patterns
• C. Allow the rep to allocate units to meet the sales target, provided the customers sign a risk acknowledgement
• D. Process the subscriptions as submitted, but ensure the PPM is delivered before acceptance

Best answer: B

Explanation: This control directly addresses both allocation fairness and sales-incentive conflicts by forcing a suitability-based rationale and detecting switching/churning prompted by compensation.

When an offering is oversubscribed and compensation increases with production, supervisory controls should ensure allocations are made based on documented suitability—not on incentives—and that any recommended switch is reviewed for potential churning. Here, the customers have near-term liquidity needs and are being moved from another illiquid DPP, raising suitability and switching concerns. The best control is a principal review that covers both allocation decisions and incentive-driven sales behavior.

Supervisory controls should explicitly cover allocation practices and sales incentives because both can pressure reps to place products where they do not fit or to generate new commissions through unnecessary switching. In an illiquid DPP, a switch recommendation for customers with near-term cash needs is a red flag for unsuitability, and an extra selling concession/contest heightens the conflict.

A strong, risk-based control in this fact pattern is to:

• hold allocations for principal review when inventory is limited,
• require a customer-specific suitability and switch rationale (including liquidity and time horizon), and
• run surveillance/exception reports for concentration, switching frequency, and incentive-period spikes.

Delivery of disclosure alone does not mitigate compensation-driven allocation bias or churning risk.

• Disclosure-only approach misses the need to control incentive-driven allocation and switching behavior.
• Risk acknowledgement does not cure an unsuitable recommendation or a conflicted allocation practice.
• Blanket ban on switches is overbroad; supervision should ensure switches are justified, not automatically prohibited.

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Question 7

As part of a broker-dealer’s due diligence on a private real estate DPP, a representative notes that the program’s budget sets aside only $150,000 as a working capital reserve on a $25 million property. Shortly after acquisition, two major tenants vacate and an unplanned roof repair is required, exhausting the reserve.

If the program’s cash flow remains below projections, what is the most likely outcome of having inadequate working capital reserves?

• A. Investors can require the program to redeem their units at the last reported valuation
• B. The sponsor must contribute capital to restore reserves to the original budget amount
• C. The offering must be halted until reserve levels are replenished to the target amount
• D. Distributions may be reduced or suspended, and the program may need to borrow or sell assets at unfavorable terms

Best answer: D

Explanation: When reserves are depleted and cash flow is weak, the program often cuts distributions and may raise liquidity through borrowing or forced sales.

Working capital reserves are intended to cover timing gaps and unexpected operating or capital expenses. If reserves prove insufficient and property cash flow is below projections, the program commonly protects liquidity by reducing/suspending distributions and seeking other funding sources. Those funding sources can increase leverage or force asset sales on unfavorable terms, harming investor outcomes.

A key part of DPP offering review is evaluating whether working capital reserves are realistic for the property’s operating risks (vacancies, repairs, leasing costs, debt service timing). When reserves are too small, routine negative surprises can quickly drain cash, leaving the program with limited choices:

• Reduce or suspend distributions to conserve cash
• Borrow (often short-term) or increase leverage to fund expenses
• Defer maintenance/leasing spend (potentially hurting performance)
• Sell assets under pressure, which can impair value

The core risk is that inadequate reserves amplify cash-flow stress and can lead to higher leverage, reduced investor distributions, and value impairment compared with a program that budgeted sufficient liquidity.

• Sponsor backstop assumption is not automatic; sponsor support depends on explicit commitments in the offering documents.
• Liquidity/redemption misconception ignores that DPP interests are typically illiquid with no investor put at a stated value.
• Offering halt confusion mixes reserve adequacy with separate offering mechanics; reserve shortfalls more often drive operating and distribution changes.

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Question 8

A DPP representative wants to post a two-page PDF on LinkedIn titled “1031 Exchanges and Delaware Statutory Trusts (DSTs): What Investors Should Know.” The PDF is intended for retail investors.

Exhibit: Box on page 2

• “ABC DST Offering: 7.0% target distribution; $50,000 minimum; offering closes March 31. Message me to reserve units.”

Under a broker-dealer’s communications policies, which action is NOT appropriate?

• A. If keeping the ABC DST box, submit the piece for principal approval and include balanced risk and compensation disclosures
• B. Post the PDF as-is, adding “for information only,” without principal approval
• C. Remove the ABC DST box and post only the general educational discussion
• D. Replace the PDF with a post that links only to previously approved firm materials for the ABC DST

Best answer: B

Explanation: Because it names a specific offering and solicits interest, it is product promotion that requires approval and appropriate disclosures.

General educational content can discuss concepts (e.g., 1031 exchanges) without steering investors to a specific program. Once the content identifies a particular DPP and includes a call to action, it becomes product promotion and must follow the firm’s advertising/retail-communication controls, including required supervisory approval and appropriate disclosures.

The key distinction is whether the communication is purely educational or is being used to promote a specific offering. Concept-level explanations (tax concepts, program structures, general risks) can be treated as educational only when they avoid naming a specific issuer/program and avoid any solicitation.

Here, the PDF includes a named DST offering plus performance-style language (“target distribution”), a minimum, a deadline, and an invitation to “reserve units.” That combination signals promotional intent, so the piece must be handled as an offering-related retail communication (or replaced with already-approved materials), including principal pre-approval and fair, balanced disclosure consistent with the offering documents. Simply adding a generic “for information only” legend does not convert a solicitation into educational content.

• “For information only” label doesn’t negate that naming an offering and asking for messages is solicitation.
• Removing product specifics keeps the post in an educational, non-promotional lane.
• Submitting for approval + disclosures aligns with treating the piece as product promotion.
• Linking to approved materials uses content that has already gone through required controls.

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Question 9

A DPP representative wants to post a “1031 exchange education” handout on the firm’s public website. The draft includes the following footer.

Exhibit: Handout footer (excerpt)

• “Sunrise Industrial DST 2024 — Target distribution 7.0% annualized, paid monthly.”
• “Distributions may be paid from operating cash flow, proceeds from borrowings, or offering proceeds; are not guaranteed.”
• “To subscribe, complete the online subscription agreement at our investor portal.”

Which interpretation is best supported by the exhibit for supervisory controls and disclosures?

• A. Institutional communication; principal approval is not required if sent to accredited investors
• B. Product promotion; principal pre-approval and fair-and-balanced disclosures are required
• C. Educational material only; no principal pre-approval is needed
• D. A tombstone-style notice; only the offering name and distribution rate may be shown

Best answer: B

Explanation: Naming a specific DST and soliciting subscriptions makes it promotional retail communication that requires principal approval and appropriate risk disclosure.

The footer identifies a specific offering, states a targeted distribution, and includes a direct call to subscribe. That turns the piece from general education into product promotion (retail communication) and triggers the firm’s pre-use approval and disclosure controls. The communication must be consistent with the offering document and present material risks in a fair and balanced way.

“Educational” content generally explains concepts (e.g., 1031 exchanges) without promoting a particular security or urging an investment decision. The exhibit goes further by naming a specific DST program, highlighting a targeted distribution, and directing readers to complete a subscription agreement. That is product promotion to the public, so it should be treated as retail communication subject to the firm’s supervisory review (typically principal pre-approval before use) and must include clear, fair-and-balanced disclosures consistent with the PPM/prospectus (including that distributions are not guaranteed and may come from sources other than operations). The key trigger here is the product-specific solicitation language, not the presence of an “education” label.

• “Educational only” label doesn’t control classification when the piece identifies an offering and asks readers to subscribe.
• Institutional-only assumption is unsupported; the piece is intended for a public website.
• Tombstone concept doesn’t fit because the content includes performance-oriented distribution language and a call to action, not just limited identifying information.

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Question 10

A DPP sponsor asks a representative to begin soliciting investors for a new best-efforts offering and provides the following excerpt from the PPM.

Exhibit: Selling arrangements (summary)

• Selling commission to selling firms: 7.0% of gross proceeds
• Dealer-manager fee: 1.0%
• Marketing support allowance (paid to selling firms): 0.5%
• Due diligence reimbursement (paid to selling firms): up to 1.0%
• Non-cash incentive: top producers invited to a sponsor-sponsored conference

Which action by the representative best aligns with required offering review standards regarding underwriting compensation?

• A. Solicit investors but avoid discussing the conference to reduce conflicts
• B. Begin soliciting if the sponsor certifies the compensation is within industry limits
• C. Begin soliciting because the amounts are disclosed in the PPM
• D. Submit the selling agreements and all compensation items for supervisory/compliance review before soliciting

Best answer: D

Explanation: All cash and non-cash compensation tied to the offering must be reviewed under the firm’s underwriting compensation controls before marketing or sales activity begins.

Before a DPP is marketed, the firm must review the full selling arrangement and all forms of offering-related compensation (direct, indirect, and non-cash) for compliance with underwriting compensation limits and firm policy. The representative’s best action is to route the proposed selling agreements and compensation schedule to the appropriate supervisory/compliance channel and wait for approval to proceed.

Offering review for DPPs includes scrutiny of the entire compensation package and selling arrangements, not just the headline selling commission. This means looking at how all amounts are paid (from offering proceeds or otherwise), who receives them (selling firms, dealer-manager, affiliates), and whether any reimbursements or non-cash benefits are part of underwriting compensation that must be assessed and controlled before solicitation.

In this scenario, multiple compensation components (selling commission, dealer-manager fee, marketing allowance, due diligence reimbursement, and a non-cash conference) create a clear need for supervisory/compliance review of underwriting compensation treatment and limits before any marketing begins. Disclosure in the PPM does not replace the firm’s obligation to review and approve selling arrangements.

• PPM disclosure isn’t approval: disclosure alone doesn’t satisfy the firm’s duty to review underwriting compensation before solicitation.
• Sponsor certification isn’t enough: the broker-dealer must independently evaluate compensation and selling agreements.
• Silencing a conflict isn’t a control: avoiding mention of an incentive doesn’t address whether it is permitted, capped, and properly supervised.

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• Purchase Processing
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