Series 22 common mistakes
Series 22 · Understand the traps and how to avoid them.
During the initial prospecting call, the candidate describes a program with phrases like 'guaranteed income,' 'you can't lose because of the write-offs,' or 'this is tax-free money,' using the sponsor's marketing language without the accompanying risk disclosure.
Sponsor brochures for DPPs lead with tax benefits and projected distributions, and the candidate paraphrases them under pressure to build interest quickly; the risk language is buried on later pages and gets dropped in conversation.
What to do instead
Work only from approved materials, and for every benefit claim you make, state the paired risk in the same breath: intangible drilling cost deductions reduce taxable income but do not guarantee a deduction in any given year (passive activity limits, AMT), and the program can lose the entire invested amount. Get the issuer's or CMO's written approval before using any non-approved talking point.
The candidate either mails a flyer or posts on social media about a 'private placement' without checking the exemption, or refuses to use any general advertising for an offering that is actually being conducted under Rule 506(c).
All DPP private placements get lumped together as 'Reg D,' and the candidate never asks the issuer which exemption is being relied on, so 506(b) and 506(c) rules get applied interchangeably.
What to do instead
Before any communication goes out, get written confirmation from the issuer/CMO of the exemption being used. Rule 506(b) permits up to 35 non-accredited but sophisticated purchasers and prohibits general solicitation and advertising. Rule 506(c) permits general solicitation but requires the issuer to take reasonable steps to verify accredited status, so a self-certifying questionnaire alone is not enough.
The candidate marks a customer as an accredited investor using total net worth that includes equity in the primary residence, or using $200,000 of combined income for the customer and spouse.
Standard net-worth worksheets and older training materials include the home, and the $200,000/$300,000 income split is easy to reverse under time pressure.
What to do instead
Apply the definition precisely: net worth above $1,000,000 excluding the value of the primary residence (with related mortgage debt excluded only up to the home's fair market value), or income above $200,000 individually or $300,000 jointly in each of the two most recent years with a reasonable expectation of the same this year. Note the basis on which the customer qualified in the file.
The candidate takes a DPP order from a non-accredited customer without ever computing the customer's liquid net worth, or accepts a rough verbal estimate and writes nothing down.
The account opening form captures net worth and income but not illiquid versus liquid assets, so the concentration limit looks satisfied on paper and the calculation is skipped.
What to do instead
Compute liquid net worth explicitly (total assets excluding the primary residence, home furnishings and automobiles, minus total liabilities) and test the proposed investment against the concentration limit for non-accredited customers under FINRA Rule 2310 (generally not more than 10% of liquid net worth; NASAA guidelines apply a similar 10% guideline to non-traded REITs). Show the arithmetic and the source of the figures in the customer file.
The candidate recommends a long-term, illiquid program to a customer whose stated objective is current income, or who told the candidate the money is needed within two or three years, and then documents the objective as 'growth and income' to make the ticket fit.
The customer profile was filled in at account opening and never revisited, and the candidate retrofits the objective to the product rather than screening the product against the objective.
What to do instead
Before recommending, restate the customer's time horizon, liquidity needs and income requirement and match the program's expected holding period and distribution schedule to them. If there is a conflict, do not recommend the program or recommend a materially smaller allocation, and document the specific discussion rather than editing the stated objective.
The candidate presents an oil and gas program as suitable primarily because a high percentage of the investment is deductible in year one, treating the deduction as equivalent to a return of capital.
The sponsor's material highlights the percentage of the offering attributable to intangible drilling costs, and the candidate conflates a tax deduction with cash received.
What to do instead
Explain that intangible drilling cost and depletion deductions reduce taxable income; they do not return cash. Deductions are subject to passive activity loss limits, can be recaptured or phased out on disposition, and are worthless against a dry hole. Suitability must rest on reserves, production projections, commodity price assumptions, the general partner's track record and the customer's ability to bear total loss.
The candidate tells a real estate program customer that distributions are tax-free income, or omits any discussion of phantom income.
Distributions arrive regularly and feel like income, and the candidate has never worked through the interaction between depreciation and mortgage principal amortization.
What to do instead
Explain that distributions are frequently a return of capital that reduces the investor's basis and produces taxable gain on sale, and that as depreciation deductions decline while mortgage principal amortization increases, taxable income can exceed cash distributions, leaving the investor with a tax bill and no cash to pay it. Walk through a numeric example in the suitability discussion.
The candidate treats a DPP position as readily saleable, telling the customer they can 'get out whenever they want' or that a roll-up will automatically convert the units into liquid securities.
The units appear on a statement with a value, and the candidate has never examined the program's redemption provisions or the secondary market disclosure.
What to do instead
State plainly that units generally have no established secondary market, that redemption may be limited, suspended or priced at a discount, and that a roll-up requires an investor vote, is subject to independent fairness review and involves conflicts between the general partner and limited partners. Confirm the customer understands the illiquidity before the order is accepted and document that discussion.
The candidate forwards a subscription with a missing signature or an incomplete investor questionnaire, or sends the customer's check to the sponsor before the minimum offering amount has been raised.
Candidates treat a DPP subscription like a mutual fund ticket, assuming the paperwork can be corrected after the money moves.
What to do instead
Verify the subscription agreement is complete and signed, the investor questionnaire and suitability information are on file, and the prospectus was delivered for the required period before the sale confirmation. Funds must go to the escrow or impound account and be promptly returned if the minimum offering amount is not reached.
The candidate accepts a DPP purchase on an oral instruction over the phone, enters the order, and relies on the confirmation as the entire record of the transaction.
The habit is carried over from liquid securities, where a verbal order plus a confirmation is normal practice, and the candidate does not recognize that DPP purchases are subscription-based.
What to do instead
Obtain and verify the customer's written authorization and signed subscription agreement before the order is placed, record the order details (units, offering price, date), confirm the price and unit count with the customer, and retain the subscription agreement, investor questionnaire, suitability determination and confirmation in the customer file per the firm's recordkeeping requirements.