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Series 39 study materials
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Series 39 practice questions

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Question 1Structure and Regulation of Direct Participation Program (DPP) Offerings

Which of the following is structured as a direct participation program because it passes income and losses through to its investors?

  1. A closed-end bond fund
  2. A money market mutual fund
  3. A publicly traded C corporation
  4. A limited partnership Correct answer.

Explanation

A direct participation program is a flow-through vehicle, most commonly a limited partnership, in which income, gains, losses, and deductions pass through to investors who report them on their own returns. C corporations pay tax at the entity level, and mutual funds are investment companies rather than DPPs.

Question 2Structure and Regulation of Direct Participation Program (DPP) Offerings

In a typical limited partnership DPP, which party manages the program and bears unlimited liability for its obligations?

  1. The custodian bank
  2. The general partner Correct answer.
  3. The transfer agent
  4. The limited partners

Explanation

The general partner runs the program, makes investment decisions, and is personally liable for partnership obligations. Limited partners contribute capital but do not manage the program, which preserves their limited liability.

Question 3Structure and Regulation of Direct Participation Program (DPP) Offerings

A limited partner's liability in a DPP is generally limited to:

  1. capital contributed plus unpaid commitments Correct answer.
  2. twice the amount originally subscribed
  3. the partner's share of recourse debt only
  4. all debts of the partnership

Explanation

Limited partners risk only the capital they have contributed plus any subscription amount they have committed but not yet paid. They are not personally liable for the partnership's general obligations as long as they do not take part in control of the business.

Question 4Structure and Regulation of Direct Participation Program (DPP) Offerings

Which document does an investor sign to make representations about eligibility and agree to purchase interests in a DPP?

  1. The prospectus
  2. The partnership agreement
  3. The promissory note
  4. The subscription agreement Correct answer.

Explanation

The subscription agreement is the investor's offer to buy interests and contains representations about sophistication, accredited status, and suitability. The partnership agreement governs the entity, and the prospectus provides disclosure.

Question 5Structure and Regulation of Direct Participation Program (DPP) Offerings

Interests in most DPPs are characterized by:

  1. listing on a national securities exchange
  2. a guaranteed repurchase by the general partner
  3. daily redemption at net asset value
  4. limited transferability and no established secondary market Correct answer.

Explanation

DPP interests are illiquid; transfers usually require general partner consent and there is no organized secondary market. Investors should expect to hold the interest for the program's full term.

Question 6Structure and Regulation of Direct Participation Program (DPP) Offerings

The defining tax feature of a direct participation program is that:

  1. gains are always taxed at preferential capital gains rates
  2. income and losses flow through to investors, who report them on their own returns Correct answer.
  3. the entity pays corporate income tax on all earnings
  4. distributions are tax-free until the investor's basis reaches zero

Explanation

A DPP is structured so that the entity itself is generally not taxed; instead, items of income, gain, loss, deduction, and credit pass through to the investors. This flow-through treatment is what distinguishes a DPP from a C corporation.

Question 7Structure and Regulation of Direct Participation Program (DPP) Offerings

Under the NASAA Statement of Policy, organization and offering expenses for a DPP are generally capped at what percentage of gross proceeds?

  1. 5%
  2. 15% Correct answer.
  3. 25%
  4. 10%

Explanation

The NASAA guidelines generally limit organization and offering expenses to 15% of gross proceeds, with selling expenses separately constrained. Amounts above the cap are typically borne by the sponsor rather than investors.

Question 8Structure and Regulation of Direct Participation Program (DPP) Offerings

FINRA Rule 2310 limits total underwriting compensation in a DPP offering to what percentage of gross proceeds?

  1. 15%
  2. 8%
  3. 5%
  4. 10% Correct answer.

Explanation

Rule 2310 caps total underwriting compensation, including finder's fees and wholesaling, at 10% of gross proceeds. Compensation above that level is considered unfair and unreasonable.

Question 9Structure and Regulation of Direct Participation Program (DPP) Offerings

Under Rule 506(b) of Regulation D, an issuer may sell to an unlimited number of accredited investors and to no more than how many non-accredited purchasers?

  1. 35 Correct answer.
  2. 100
  3. Unlimited
  4. 10

Explanation

Rule 506(b) permits an unlimited number of accredited investors but caps non-accredited purchasers at 35, and those purchasers must meet sophistication requirements. General solicitation is prohibited in a 506(b) offering.

Question 10Structure and Regulation of Direct Participation Program (DPP) Offerings

An issuer relying on Regulation D must file Form D with the SEC no later than:

  1. the date of the first sale
  2. 30 days before the first sale
  3. the end of the issuer's fiscal year
  4. 15 days after the first sale Correct answer.

Explanation

Rule 503 requires a Form D notice filing within 15 days after the first sale of securities in the offering. Amendments are required for certain subsequent events.

Question 11Structure and Regulation of Direct Participation Program (DPP) Offerings

When DPP interests are offered in a state, the typical state securities law requirement is:

  1. no state filing, because DPPs are always federally preempted
  2. automatic effectiveness once the SEC declares a registration effective
  3. coordination, qualification, or notice filing, as applicable Correct answer.
  4. filing only in the state where the general partner resides

Explanation

States generally regulate offers through coordination, qualification, or notice filing, and the applicable route depends on the federal exemption or registration used. State fees and administrator review can apply even where federal law preempts substantive review.

Question 12Structure and Regulation of Direct Participation Program (DPP) Offerings

Before recommending a DPP, a representative must have reasonable grounds to believe the investment is suitable based on:

  1. the customer's financial profile and tax status Correct answer.
  2. the investor's age and employment status only
  3. the general partner's historical track record alone
  4. the representative's own personal tax bracket

Explanation

Suitability requires an inquiry into the customer's financial situation, investment objectives, risk tolerance, and tax status, plus the customer's ability to bear the illiquidity. A DPP's tax benefits do not substitute for a suitability analysis.

Question 13Structure and Regulation of Direct Participation Program (DPP) Offerings

A general partner plans to buy property for the partnership from an entity it controls. The offering document must:

  1. omit the transaction because it is legal
  2. disclose the conflict and its terms Correct answer.
  3. transfer the property at book value without disclosure
  4. be amended only after the closing

Explanation

Self-dealing and other conflicts of interest must be fully disclosed, with the terms of the transaction, so investors can assess whether it is fair. Undisclosed affiliate transactions violate the fairness and disclosure standards applicable to DPP offerings.

Question 14Structure and Regulation of Direct Participation Program (DPP) Offerings

A blind pool DPP is one in which:

  1. properties have been appraised and identified in advance
  2. the general partner has no prior industry experience
  3. no specific properties are identified at the outset Correct answer.
  4. investors may redeem their interests at any time

Explanation

In a blind pool, investors commit capital before the general partner has identified the specific assets to be acquired. This increases uncertainty because investors must rely on the sponsor's judgment and track record.

Question 15Structure and Regulation of Direct Participation Program (DPP) Offerings

A roll-up transaction that combines several DPPs generally requires:

  1. approval only by the largest limited partner
  2. no investor vote if the general partner initiates it
  3. SEC approval of the merits of the merger
  4. disclosure of appraisals and terms, plus an LP vote Correct answer.

Explanation

Roll-ups are subject to detailed disclosure, including independent appraisals, and generally require the approval of limited partners voting as a class. Dissenters are commonly offered appraisal or cash-out rights.

Question 16Structure and Regulation of Direct Participation Program (DPP) Offerings

Subscription funds in a best-efforts DPP offering are typically held in escrow until:

  1. the general partner requests a draw
  2. the SEC declares the registration effective
  3. the first sale is made
  4. the minimum offering amount is reached Correct answer.

Explanation

Escrowed subscription funds are released only when the minimum offering amount is achieved, so the program has enough capital to operate as described. If the minimum is not met, funds are returned to investors.

Question 17Structure and Regulation of Direct Participation Program (DPP) Offerings

When a general partner's distributions are subordinated, the general partner:

  1. receives no compensation of any kind
  2. is paid first from gross offering proceeds
  3. is paid after LPs receive a priority return Correct answer.
  4. must refund all fees if the program loses money

Explanation

Subordination means the GP's share of distributable cash or profits is deferred until limited partners have received a stated priority return. This aligns the sponsor's incentive with investor performance.

Question 18Structure and Regulation of Direct Participation Program (DPP) Offerings

A member firm's due-diligence obligation in a DPP offering requires the firm to:

  1. obtain a fairness opinion for every offering
  2. guarantee the program's projected returns
  3. buy a minimum number of units for its own account
  4. verify the reasonableness of the offering's terms and sponsor representations Correct answer.

Explanation

Rule 2310 requires a member to have a reasonable basis for recommending a DPP, which means investigating the sponsor, the assets, and the offering terms. The firm cannot rely solely on the sponsor's representations.

Question 19Structure and Regulation of Direct Participation Program (DPP) Offerings

DPP sales material filed with FINRA's Advertising Regulation Department is reviewed to determine whether it:

  1. conforms to the general partner's marketing plan
  2. is fair and balanced and not misleading Correct answer.
  3. has been pre-approved by the state administrator
  4. presents projections in a standardized format

Explanation

The standards for communications with the public require that sales material be fair and balanced, with no misleading statements or exaggerated claims. Filing with FINRA is a regulatory review, not a merit approval.

Question 20Structure and Regulation of Direct Participation Program (DPP) Offerings

An individual generally qualifies as an accredited investor on the basis of net worth of at least:

  1. $1 million excluding the primary residence Correct answer.
  2. $2 million excluding the primary residence
  3. $1 million including the primary residence
  4. $500,000 including the primary residence

Explanation

The accredited investor net worth test is $1 million, excluding the value of the investor's primary residence. Alternatively, income of $200,000 individually or $300,000 jointly in each of the prior two years may qualify.

Question 21Structure and Regulation of Direct Participation Program (DPP) Offerings

Rule 506(d) disqualifies an offering from reliance on Rule 506 when:

  1. any purchaser is a non-accredited investor
  2. the offering exceeds $1 million
  3. a covered person has a disqualifying event Correct answer.
  4. no placement agent is used

Explanation

The bad actor rule disqualifies an offering if the issuer or specified covered persons, such as senior officers and 20% beneficial owners, have certain disqualifying events. Covered persons also include promoters and investment managers of the issuer.

Question 22Structure and Regulation of Direct Participation Program (DPP) Offerings

The at-risk rules generally limit an investor's deductible DPP losses to:

  1. twice the investor's original subscription
  2. the program's gross revenue for the year
  3. cash invested plus certain recourse debt Correct answer.
  4. the total capital contributed by all partners

Explanation

Under the at-risk rules, losses are deductible only to the extent the investor is economically at risk, generally cash contributed plus certain recourse debt for which the investor is liable. Nonrecourse debt generally does not create at-risk basis.

Question 23Structure and Regulation of Direct Participation Program (DPP) Offerings

When a general partner engages in self-dealing with the partnership, the transaction must generally be:

  1. approved by the SEC
  2. fair to the partnership and fully disclosed Correct answer.
  3. ratified by a majority of the GP's affiliates
  4. completed before the offering commences

Explanation

Conflicted transactions are permitted only if they are fair to the partnership and fully disclosed, and often require approval by a majority of the limited partners. The GP owes fiduciary duties and cannot use its position to extract unfair benefits.

Question 24Structure and Regulation of Direct Participation Program (DPP) Offerings

Which statement about limited partner voting in a roll-up is accurate?

  1. Limited partners may not vote on a roll-up under any circumstances
  2. The GP's interest controls the outcome regardless of the LP vote
  3. Only accredited limited partners may vote
  4. LPs vote as a class, and dissenters may have appraisal rights Correct answer.

Explanation

Roll-up proposals are submitted to limited partners voting as a class, and the disclosure must include independent appraisals and the terms of the transaction. Dissenting limited partners typically receive appraisal or cash-out rights.

Question 25Structure and Regulation of Direct Participation Program (DPP) Offerings

Under NSMIA, a Rule 506 offering is:

  1. required to be registered by coordination in each state
  2. exempt from all state filing requirements
  3. subject to state notice filings but not merit review Correct answer.
  4. subject to state qualification only for non-accredited purchasers

Explanation

Securities sold under Rule 506 are covered securities, so states cannot require merit review or qualification, but they may require notice filings and fees. States retain authority to investigate and act against fraud.

Question 26Structure and Regulation of Direct Participation Program (DPP) Offerings

In a DPP structured as a limited partnership, the limited partners generally have liability that is:

  1. unlimited for all debts and obligations of the partnership
  2. joint and several with the general partner for partnership liabilities
  3. limited to the capital they contributed Correct answer.
  4. conditioned on the partnership earning taxable income

Explanation

A limited partner is a passive investor whose liability is generally limited to the amount of capital contributed to the partnership. The general partner, by contrast, typically bears unlimited liability for partnership obligations.

Question 27Structure and Regulation of Direct Participation Program (DPP) Offerings

The general partner of a DPP owes which duty to the limited partners?

  1. A duty owed exclusively to the partnership's creditors
  2. No special duty because limited partners are passive investors
  3. Only the duties expressly listed in the subscription agreement
  4. A fiduciary duty to act in the partnership's best interest Correct answer.

Explanation

The general partner is the managing fiduciary of the partnership and owes duties of loyalty and care to the partnership and its limited partners. These duties arise from the partnership relationship and applicable law, not merely from the subscription agreement.

Question 28Structure and Regulation of Direct Participation Program (DPP) Offerings

For federal income tax purposes, a limited partner's share of income from a DPP is generally treated as:

  1. portfolio income
  2. tax-exempt income
  3. passive activity income Correct answer.
  4. active business income

Explanation

DPP investments are generally passive activities, so the limited partner's share of income or loss is subject to the passive activity rules. Portfolio income generally includes interest and dividends rather than operating income from a DPP.

Question 29Structure and Regulation of Direct Participation Program (DPP) Offerings

An individual investor satisfies the accredited-investor income test by having annual income of at least:

  1. $200,000, or $300,000 jointly with a spouse Correct answer.
  2. $250,000, or $500,000 jointly with a spouse
  3. $100,000, or $150,000 jointly with a spouse
  4. $1,000,000, or $2,000,000 jointly with a spouse

Explanation

Under Rule 501(a), an individual generally qualifies as an accredited investor on the income basis with income over $200,000, or over $300,000 jointly with a spouse, in each of the two most recent years and a reasonable expectation of the same income.

Question 30Structure and Regulation of Direct Participation Program (DPP) Offerings

In a registered public offering of DPP interests, a prospective investor must generally receive which document before purchasing?

  1. A proxy statement
  2. A trust indenture
  3. A prospectus Correct answer.
  4. A partnership tax return

Explanation

The Securities Act requires delivery of a prospectus in a registered offering, and a DPP offering registered with the SEC must provide the prospectus to prospective investors. The prospectus contains the material information needed to evaluate the offering.

Question 31Structure and Regulation of Direct Participation Program (DPP) Offerings

An issuer conducting a Rule 506(c) offering may use general solicitation only if it:

  1. takes reasonable steps to verify purchasers are accredited Correct answer.
  2. files a registration statement with the SEC before soliciting
  3. limits sales to no more than 35 non-accredited investors
  4. sells exclusively to institutional investors

Explanation

Rule 506(c) permits general solicitation and advertising if all purchasers are accredited investors and the issuer takes reasonable steps to verify accredited status. The 35 non-accredited purchaser limit applies to Rule 506(b), not Rule 506(c).

Question 32Structure and Regulation of Direct Participation Program (DPP) Offerings

The NASAA Statement of Policy regarding DPP offerings is intended primarily to:

  1. establish uniform national securities registration forms
  2. provide guidelines for fair and equitable DPP offering terms Correct answer.
  3. set maximum federal income tax rates for DPP investors
  4. require all DPPs to register as investment companies

Explanation

The NASAA Statement of Policy provides state securities administrators with guidelines on DPP offering terms, including compensation, conflicts of interest, and disclosure. It is not a tax statute or a federal registration form.

Question 33Structure and Regulation of Direct Participation Program (DPP) Offerings

A non-listed DPP interest is generally considered illiquid because:

  1. it is freely transferable without any restrictions
  2. it must be redeemed daily at net asset value
  3. its value is guaranteed by the general partner
  4. no established public market exists Correct answer.

Explanation

Non-listed DPP interests have no established public trading market, so investors may be unable to sell them quickly or at a fair price. This lack of marketability is a key risk disclosed in DPP offerings.

Question 34Structure and Regulation of Direct Participation Program (DPP) Offerings

Under FINRA Rule 2310, a member recommending a DPP must determine that the customer meets at least two of three suitability tests. Those tests involve:

  1. credit score, collateral, and margin balance
  2. tax bracket, state of residence, and marital status
  3. age, investment experience, and employment status
  4. net worth, gross income, and the amount invested in the DPP Correct answer.

Explanation

Rule 2310's DPP suitability standards use three alternative tests based on net worth, gross income, and the size of the DPP investment relative to net worth. The customer must satisfy at least two of the three.

Question 35Structure and Regulation of Direct Participation Program (DPP) Offerings

A customer has $70,000 of net worth and $70,000 of gross income. Under the FINRA DPP suitability standards, the customer's investment in a single DPP may not exceed:

  1. 50% of gross income
  2. 100% of net worth
  3. 10% of net worth Correct answer.
  4. 25% of net worth

Explanation

When a customer relies on the $70,000 net worth and $70,000 gross income test, the DPP investment may not exceed 10% of the customer's net worth. This concentration limit helps limit the customer's exposure to an illiquid investment.

Question 36Structure and Regulation of Direct Participation Program (DPP) Offerings

Which of the following is generally included in total underwriting compensation for a DPP offering under FINRA Rule 2310?

  1. The partnership's annual property management fee
  2. The cost of the property acquired by the partnership
  3. Finder's fees paid to persons who locate investors Correct answer.
  4. Interest paid on the partnership's mortgage

Explanation

Underwriting compensation includes items such as selling concessions, finder's fees, wholesaling fees, and due diligence fees. Property acquisition costs, mortgage interest, and property management fees are partnership costs rather than underwriting compensation.

Question 37Structure and Regulation of Direct Participation Program (DPP) Offerings

A best-efforts DPP offering does not use a third-party escrow. Under Exchange Act Rule 15c2-4, subscription funds must be:

  1. invested in short-term government securities for the issuer's benefit
  2. delivered directly to the general partner for immediate use
  3. placed in a separate bank account and not commingled with firm funds Correct answer.
  4. returned to investors within 24 hours of receipt

Explanation

Rule 15c2-4 requires that subscription funds in a best-efforts offering be held in escrow or in a separate bank account and not commingled with the firm's funds. The funds are released only when the offering conditions are met.

Question 38Structure and Regulation of Direct Participation Program (DPP) Offerings

A non-accredited purchaser in a Rule 506(b) offering must generally:

  1. be a resident of the issuer's state
  2. purchase at least $100,000 of the offering
  3. agree to resell the securities only through a registered broker-dealer
  4. have sufficient knowledge and experience to evaluate the investment Correct answer.

Explanation

Rule 506(b) allows up to 35 non-accredited purchasers, but each must be sophisticated or represented by a purchaser representative. Sophistication means sufficient knowledge and experience to evaluate the investment's merits and risks.

Question 39Structure and Regulation of Direct Participation Program (DPP) Offerings

When a member firm sells DPP interests on a best-efforts basis, the firm acts as:

  1. an agent for the issuer without a purchase commitment Correct answer.
  2. an underwriter that must purchase any unsold interests
  3. a principal that guarantees the entire offering will be sold
  4. a trustee holding the partnership's assets

Explanation

In a best-efforts offering, the member firm acts as the issuer's agent and agrees to use reasonable efforts to sell the interests. The firm does not commit to purchase unsold interests, unlike a firm-commitment underwriting.

Question 40Structure and Regulation of Direct Participation Program (DPP) Offerings

Which of the following is generally classified as an organization and offering expense of a DPP?

  1. The purchase price of the partnership's real estate
  2. Mortgage interest expense
  3. Legal and accounting fees for preparing the offering Correct answer.
  4. Ongoing property management fees

Explanation

Organization and offering expenses include costs of forming the partnership and preparing the offering, such as legal, accounting, printing, filing, and marketing expenses. Acquisition costs and operating expenses are not organization and offering expenses.

Question 41Structure and Regulation of Direct Participation Program (DPP) Offerings

Limited partners in a DPP typically vote on which of the following?

  1. Routine property maintenance schedules
  2. Daily operational decisions of the partnership
  3. The hiring and firing of the partnership's rank-and-file employees
  4. Major matters such as removing the general partner Correct answer.

Explanation

Limited partners are passive investors and generally vote only on major matters specified in the partnership agreement, such as removal of the general partner or a sale of substantially all assets. Ordinary operational decisions are left to the general partner.

Question 42Structure and Regulation of Direct Participation Program (DPP) Offerings

A limited partnership agreement for a DPP usually restricts transfers of limited partner interests because:

  1. the partnership wants to avoid SEC registration of the interests
  2. limited partners are prohibited from ever selling their interests
  3. transfer restrictions increase the interests' daily marketability
  4. the GP must preserve control and comply with rules Correct answer.

Explanation

Transfer restrictions help the general partner preserve control over ownership and avoid unintended securities-law or tax consequences. Transfers often require general partner consent, and the restrictions reduce marketability rather than increase it.

Question 43Structure and Regulation of Direct Participation Program (DPP) Offerings

An all-or-none DPP offering states that no securities will be sold unless the entire offering amount is subscribed. Under Exchange Act Rule 10b-9, if the full amount is not subscribed, the issuer must:

  1. return all subscription funds to investors promptly Correct answer.
  2. issue securities for the amount actually subscribed
  3. retain the funds and reduce the size of the offering
  4. extend the offering indefinitely until fully subscribed

Explanation

Rule 10b-9 is designed to prevent fraud in all-or-none offerings by requiring that investor funds be returned if the stated contingency is not met. The issuer cannot simply keep the funds and sell a smaller amount when the offering is expressly all-or-none.

Question 44Structure and Regulation of Direct Participation Program (DPP) Offerings

An equipment-leasing DPP faces residual-value risk, which is the risk that:

  1. the general partner will resign before the leases expire
  2. lease payments will be taxed as ordinary income
  3. equipment will be worth less than expected at lease end Correct answer.
  4. the equipment will be leased to a foreign lessee

Explanation

Residual-value risk is the risk that leased equipment will have a lower value than projected when the lease term ends. That lower value can reduce the DPP's returns when the equipment is sold or re-leased.

Question 45Structure and Regulation of Direct Participation Program (DPP) Offerings

Which statement about the maximum dollar amount that may be raised in a Rule 506 offering is accurate?

  1. The offering has no dollar limit under Rule 506 Correct answer.
  2. The offering is capped at $50 million in any 12-month period
  3. The offering is capped at $10 million in any 12-month period
  4. The offering is capped at $5 million in any 12-month period

Explanation

Rule 506 does not impose a dollar limit on the amount an issuer may raise, although it does impose other conditions such as purchaser-accreditation and disclosure requirements. Dollar caps apply to certain other exemptions, such as Rule 504.

Question 46Structure and Regulation of Direct Participation Program (DPP) Offerings

In an oil and gas DPP, intangible drilling costs (IDCs) are generally:

  1. capitalized and recovered only through depletion
  2. deductible currently, subject to tax limits Correct answer.
  3. taxable income to the limited partners when incurred
  4. nondeductible because they are paid to the general partner

Explanation

Intangible drilling costs, such as labor and fuel used in drilling, are generally currently deductible, although passive activity, at-risk, and alternative minimum tax rules may limit the benefit. They are not merely capitalized and recovered through depletion.

Question 47Structure and Regulation of Direct Participation Program (DPP) Offerings

For a real estate DPP structured as a limited partnership, depreciation on the partnership's buildings is generally:

  1. paid directly by the limited partners as a cash expense
  2. ignored for tax purposes because a partnership is not a taxable entity
  3. allocated to the partners, subject to passive activity limits Correct answer.
  4. deductible only by the general partner

Explanation

A partnership is a pass-through entity, so depreciation deductions are allocated to the partners and reported on their individual returns. The deductions are generally subject to the passive activity loss rules.

Question 48Structure and Regulation of Direct Participation Program (DPP) Offerings

DPP interests sold in a Rule 506 offering are restricted securities. An investor may generally resell them only if:

  1. the general partner approves the resale in writing
  2. the issuer agrees to repurchase them at original cost
  3. the resale is registered or qualifies for an exemption such as Rule 144 Correct answer.
  4. the investor has held them for at least 30 days

Explanation

Securities sold in a Rule 506 offering are restricted and cannot be freely resold unless the resale is registered under the Securities Act or qualifies for an exemption. Rule 144 is a common exemption for resales after applicable holding periods and other conditions are met.

Question 49Structure and Regulation of Direct Participation Program (DPP) Offerings

A DPP that invests directly in real estate or oil and gas is generally not regulated as an investment company because it:

  1. has fewer than 100 limited partners
  2. primarily engages in a non-securities business Correct answer.
  3. sells only to accredited investors
  4. is always registered under the Investment Company Act of 1940

Explanation

The Investment Company Act focuses on issuers primarily engaged in investing and reinvesting in securities. A DPP that directly operates real estate or oil and gas properties is generally engaged in a non-securities business and is therefore not an investment company.

Question 50Structure and Regulation of Direct Participation Program (DPP) Offerings

An issuer relying on Rule 147A for an intrastate DPP offering may use general solicitation if:

  1. the securities are listed on a national exchange
  2. all purchasers are accredited investors regardless of their state of residence
  3. all purchasers are state residents and the issuer does business there Correct answer.
  4. the offering is registered with the SEC in every state

Explanation

Rule 147A permits general solicitation and advertising, but all purchasers must be residents of the same state and the issuer must meet the doing-business requirement in that state. Resales are restricted for six months after the offering.