Try 10 focused Series 39 questions on DPP Offering Regulation, with explanations, then continue with the full Securities Prep practice test.
Series 39 DPP Offering Regulation 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.
| Item | Detail |
|---|---|
| Exam | FINRA Series 39 |
| Official topic | Function 1 - Structure and Regulation of Direct Participation Program Offerings |
| Blueprint weighting | 46% |
| Questions on this page | 10 |
A Series 39 principal is reviewing subscriptions for a DPP sold under a claimed Regulation D exemption limited to accredited investors. For this review, treat a natural person as accredited if the person has either net worth over $1 million excluding the primary residence, or income over $200,000 in each of the last two years with a reasonable expectation of the same this year; joint income threshold is $300,000. Which investor qualifies as accredited?
Best answer: C
Explanation: Net worth above $1 million excluding the primary residence satisfies the stated accredited-investor test.
The investor with $1.15 million of net worth excluding the primary residence meets the stated accredited-investor test. Under the facts given, home equity cannot be used for the net-worth threshold, and the income test requires both prior years plus a reasonable expectation for the current year.
For a DPP relying on a Regulation D exemption limited to accredited investors, the principal must confirm that each subscriber meets the applicable standard before accepting the subscription. Under the rule stated in the stem, a natural person qualifies through either of two separate paths: net worth over $1 million excluding the primary residence, or the required income level in each of the last two years plus a reasonable expectation of the same this year. The investor with $1.15 million excluding the home qualifies immediately under the net-worth test. The other profiles fail because they either rely on home equity, fall short on the current-year income expectation, or miss one of the two required prior-year income thresholds. The key is to apply the stated exemption standard exactly and document the basis used.
A DPP broker-dealer is reviewing a sponsor’s planned public offering of LLC interests to retail investors in several states. The issuer is organized in the U.S., has its principal place of business in the U.S., is not an Exchange Act reporting company, and neither the issuer nor its control persons is disqualified; for this question, assume the proposed $18 million raise is below the applicable Regulation A limit. Before approving underwriting and communications, what is the best principal-level decision on the offering’s registration status?
Best answer: A
Explanation: Regulation A can be available for an eligible small public offering, so the principal should verify eligibility and proceed through the Reg A review process.
Regulation A is a conditional exemption that may be used for certain eligible small public offerings. Under the stated facts, the offering is not automatically disqualified, so the principal’s best decision is to evaluate and supervise it under the Regulation A framework rather than force full registration or a private-placement alternative.
The core concept is that Regulation A may be available for a small public offering if the issuer is eligible and the offering fits the exemption’s conditions. Here, the stem gives the key eligibility facts: the issuer is U.S.-based, not already an Exchange Act reporting company, has no stated disqualification, and the offering size is within the assumed limit. That means the principal should not automatically reject Regulation A just because the product is a DPP-style LLC interest or because the sale is public and multistate.
At the principal level, the proper supervisory decision is to:
The key takeaway is that Regulation A is a possible small-issues public-offering route, not a private-offering-only exemption.
A Series 39 principal reviews a proposed arrangement for a private real estate DPP. An outside “finder” will introduce prospects, join calls with them using only firm-approved offering materials, and receive 2% of each referred investor’s purchase amount if the investor subscribes. Subscription checks will go directly to escrow. The finder is not associated with a broker-dealer and is not FINRA registered. What is the primary red flag?
Best answer: A
Explanation: Paying a non-registered person based on investor purchases is transaction-based compensation and is a classic indicator of unregistered securities selling activity.
The main issue is that the outside person is being paid based on completed investments while participating in investor calls. That arrangement looks like securities solicitation by an unregistered selling participant, which is a far more serious supervisory concern than training, recordkeeping, or escrow mechanics.
In a DPP offering, a principal must distinguish a limited finder from someone functioning as a selling participant. A true finder generally has a narrowly limited role, such as making introductions, and transaction-based compensation is a major red flag that the person is acting like a broker. Here, the outside person is not registered, joins investor calls, and is paid 2% of each resulting purchase. Those facts point to unregistered securities selling activity.
Using firm-approved materials and sending checks directly to escrow may help with communications and funds handling, but they do not cure the registration problem. The principal’s primary supervisory concern is to stop or restructure the arrangement so the person is not compensated based on securities sales and does not engage in solicitation activity.
A Series 39 principal is conducting the final pre-use review for a public DPP offering. The sponsor will use both an internal wholesaling desk employed by an affiliated dealer-manager and a separate third-party wholesaler with no common ownership. The draft prospectus broadly refers to “wholesaling services,” and the firm’s written supervisory procedures do not identify who reviews each wholesaler’s communications. What is the best next step before the offering is launched?
Best answer: C
Explanation: Before launch, the principal should distinguish the affiliated and unaffiliated wholesaling roles, ensure the disclosures accurately reflect each arrangement and compensation, and establish who supervises related communications.
The principal should address both disclosure and supervision before sales begin. When a DPP uses both affiliated and unaffiliated wholesalers, the arrangement, related compensation, and conflicts must be accurately described, and the firm must assign supervisory review of the communications each wholesaler will use.
This is a sequencing and control question. The issue is not simply that wholesaling exists, but that the offering uses two different wholesaling relationships: one affiliated with the sponsor structure and one independent. That difference matters because affiliation can create conflicts that should be clearly disclosed, and both channels require defined supervisory responsibility for communications used in the distribution process.
Before launch, the principal should:
Launching first, disclosing later, or assuming an affiliated wholesaler falls outside the member’s supervision would be improper. The key takeaway is that affiliation affects disclosure analysis, but both affiliated and unaffiliated wholesaling activity requires clear supervisory coverage.
A DPP LLC’s offering document states that total underwriting compensation will not exceed 8% of gross proceeds, allocated as 6% selling commissions, 1% dealer-manager fee, and 1% due-diligence reimbursement. During a supervisory review, the Series 39 principal finds a proposed payout of 6% selling commissions, 1% dealer-manager fee, and 1.3% labeled as due-diligence reimbursement because wholesaling travel costs were shifted into that category. Which action best aligns with the principal’s duty?
Best answer: A
Explanation: Compensation that exceeds disclosed amounts or is reclassified inconsistently should not be approved unless the offering terms are properly revised before use.
The supervisory issue is not just the higher total compensation, but also the improper reclassification of expenses into a disclosed compensation category. A principal should stop the nonconforming payout and require the compensation structure to match the offering document before it is used.
In a DPP offering, underwriting compensation must be paid and classified consistently with the amounts and categories disclosed in the offering document. Here, the proposed payout both exceeds the stated 8% cap and shifts wholesaling travel into due-diligence reimbursement, creating a disclosure and compensation-allocation problem. A principal’s role is to prevent use of a payout structure that is not supported by the offering terms, verify that expense classifications are accurate, and require correction before sales continue under that plan.
Later disclosure or an offset elsewhere does not cure a payment structure that was inaccurate when used. The key supervisory standard is that compensation must be properly classified, within disclosed limits, and applied consistently across parties.
A Series 39 principal reviews two proposed payments in separate public DPP offerings.
Which classification best matches these payments for underwriting-compensation review?
Best answer: B
Explanation: Alpha is tied to sales and can be retained whether or not actual expenses match, so its substance is compensation, while Beta is limited to documented out-of-pocket costs.
Economic substance controls compensation classification. A payment based on sales proceeds that the dealer-manager may keep like an allowance is treated as underwriting compensation, while a documented pass-through of actual expenses without markup is generally a reimbursement.
In DPP underwriting review, the label on a payment does not decide its treatment. The key question is what the payment really does economically. The “education allowance” in Offering Alpha is calculated as a percentage of gross proceeds sold and the dealer-manager may retain unused amounts, so it functions like selling-related compensation rather than a strict repayment of incurred costs.
By contrast, Offering Beta is limited to documented, actual seminar and printing expenses, includes no markup, and is paid only if the expense is actually incurred. That structure looks like a true reimbursement of out-of-pocket costs, not underwriting compensation.
The closest trap is treating any investor-education expense as automatically non-compensation; the deciding factor is whether the payment is sales-based and retainable.
A DPP sponsor has filed, but not yet made effective, a registration statement for a public limited-partnership offering. The firm’s Series 39 principal reviews this newspaper advertisement for use during the waiting period.
ABC Energy Income LP
Public offering of limited partnership interests
Price: $10 per unit
Offering will be made only by prospectus.
For a prospectus, contact XYZ Securities
100 Main Street, Denver, CO 80202
(555) 010-1000
Which interpretation is fully supported by the exhibit?
Best answer: D
Explanation: Because the excerpt is limited to basic offering facts and directs investors to the prospectus, it fits a tombstone-style communication not deemed a prospectus.
The exhibit is a classic tombstone-style notice. It gives only basic identifying information, states that the offering will be made only by prospectus, and tells investors how to obtain that prospectus, so it is not treated as a prospectus itself.
A registration statement is the SEC filing for the offering, while a prospectus is the disclosure document used to offer and sell the securities. Some very limited written communications during the waiting period are permitted without being deemed a prospectus when they stay within basic identifying facts about the offering and direct investors to the prospectus for full disclosure.
Here, the ad names the issuer, identifies the security, states the price, and tells readers that the offering will be made only by prospectus. That makes it a tombstone-style communication rather than the registration statement itself or a full statutory prospectus. The key point is that the exhibit does not provide the substantive disclosure a prospectus would contain; it merely points investors to that document.
A public DPP offering’s subscription agreement and sales brochure state that investor funds will be held in escrow until at least $8 million is sold by September 30. The materials also state that subscriptions will be canceled and funds promptly refunded if the minimum is not met. Under Rule 10b-9 concepts, which statement is most accurate?
Best answer: B
Explanation: When an offering is sold subject to a stated minimum contingency, the firm must follow that contingency exactly before releasing investor funds.
Rule 10b-9 concepts require a firm to honor contingent-offering terms exactly as represented in the sales and subscription materials. If the offering says funds stay in escrow until a stated minimum is reached by a stated date, the funds cannot be released before that condition is actually satisfied.
This tests the core Rule 10b-9 principle for contingent offerings: if investors are told a DPP will close only after a stated minimum is sold, that representation must be carried out exactly as described. Investor funds must stay in the escrow or trust arrangement until the stated minimum is actually met by the stated deadline. If the contingency is not satisfied, subscriptions must be canceled and funds promptly returned.
For a Series 39 principal, the supervisory point is to match operations to the offering language. The firm cannot treat a likely success as good enough, use escrowed money before the condition is met, or casually alter the minimum after investors have subscribed. The key takeaway is that contingency language in offering materials creates a binding operational requirement, not a flexible target.
A Series 39 principal reviews a website draft for a public DPP offering. The draft states, “Investors can expect a stable 7% annual income stream, fully backed by sponsor support.”
Year 1 projections
Gross offering proceeds: $12,000,000
Planned cash distributions: $840,000
Projected cash flow from operations: $630,000
Maximum sponsor support commitment: $150,000
What is the best corrective action?
Best answer: B
Explanation: Projected operations are $210,000 short of planned distributions, and the maximum $150,000 sponsor commitment still leaves $60,000 uncovered, making the claim misleading.
The communication overstates income stability and sponsor support. Planned distributions are $840,000, but projected operations provide only $630,000, and the maximum sponsor commitment adds just $150,000, leaving $60,000 uncovered.
A DPP communication cannot claim a stable income stream or full sponsor backing unless the facts support that statement. Here, the piece says the 7% distribution is fully backed, but the internal projections do not support that claim.
Because a $60,000 gap remains even if the sponsor provides the full committed amount, the communication is misleading and should be withdrawn or revised with accurate disclosure. Simply softening the language or adding a generic disclaimer would not cure a specific unsupported claim.
A DPP principal is reviewing a proposed underwriting agreement. Which feature matches a firm-commitment distribution rather than a best-efforts distribution?
Best answer: D
Explanation: A firm-commitment underwriting requires the member to purchase the securities from the issuer, so the member bears the risk of unsold units.
The defining feature of a firm-commitment distribution is that the member purchases the offering from the issuer for resale. In a best-efforts distribution, the member acts as a selling agent and does not assume the risk of unsold units.
The core distinction is who bears the distribution risk. In a firm-commitment DPP distribution, the broker-dealer purchases the securities from the issuer and then resells them to investors, so the broker-dealer takes the risk that some units may remain unsold. In a best-efforts distribution, the broker-dealer agrees to use its best efforts to sell the offering but does not buy the unsold units for its own account.
A principal reviewing underwriting terms should match the structure to the firm’s obligations:
A financial-responsibility task like reserve computations is separate from the underwriting commitment itself.
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