Series 7 Exam: Direct Participation Program Paperwork - dummies

Series 7 Exam: Direct Participation Program Paperwork

By Steven M. Rice

For the Series 7, you need to know about certain paperwork that’s specific to limited partnerships. Direct participation programs (DPPs) can raise money to invest in real estate, oil and gas, equipment leasing, and so on. However, limited partnerships have some specific tax advantages. According to tax laws, limited partnerships are not taxed directly; the income or losses are passed directly through to the investors.

Partnership agreement

The partnership agreement is a document that includes the rights and responsibilities of the limited and general partners. Included in the agreement are basics that you would probably guess such as the name of the partnership, the location of the partnership, the name of the general partner, and so on. In addition, the partnership agreement addresses the general partner’s rights to

  • Charge a management fee for making decisions for the partnership

  • Enter the partnership into contracts

  • Decide whether cash distributions will be made to the limited partners

  • Accept or decline limited partners

Certificate of limited partnership

The certificate of limited partnership is the legal agreement between the general and limited partners, which is filed with the Secretary of State in the home state of the partnership. The certificate of limited partnership includes basic information such as the name of the partnership and its primary place of business, the names and addresses of the limited and general partner(s), and the following items:

  • The objectives (goals) of the partnership and how long the partnership is expected to last

  • The amount contributed by each partner, plus future expected investments

  • How the profits are to be distributed

  • The roles of the participants

  • How the partnership can be dissolved

  • Whether a limited partner can sell or assign his interest in the partnership

If any significant changes are made to the partnership, such as adding new limited partners, the certificate of limited partnership must be amended accordingly.

Subscription agreement

The subscription agreement is an application form that potential limited partners have to complete. The general partner uses this agreement to determine whether an investor is suitable to become a limited partner. The general partner has to sign the subscription agreement to officially accept an investor into the DPP.

One of your jobs as a registered rep is to prescreen the potential limited partner to make sure that the partnership is a good fit for the individual. Also, you need to review the agreement to ensure that the information the investor provides is complete and accurate.

Besides the investor’s payment, the subscription agreement has to include items such as the investor’s net worth and annual income, a statement explaining the risks of investing in the partnership, and a power of attorney that allows the general partner to make partnership investment decisions for the limited partner.

The following question tests your ability to answer questions about DPP paperwork:

All of the following statements are TRUE regarding the subscription agreement EXCEPT

(A)    A general partner must sign the agreement to officially accept a limited partner.

(B)    A registered rep must first examine the subscription agreement to make sure that the investor has provided accurate information.

(C)    After the general partner has signed the subscription agreement, it gives the limited partner power of attorney to conduct business on behalf of the partnership.

(D)    The subscription agreement is usually sent to the general partner with some form of payment.

The answer is C. The test designers want to know that you understand what this document is and that you have a grasp of who does what. The subscription agreement is a form that the potential limited partner fills out; then the registered rep reviews the document before sending it (with the investor’s payment) to the general partner, who signs to accept the terms.

Choice B shows where the registered rep (that’s you!) comes in. Here, you assume that the “investor” is the potential limited partner, so choice B checks out.

Because this is an except question, the correct answer is C; the subscription agreement gives the general partner, not the limited partner, power of attorney to make decisions for the partnership. If you remember that limited partners don’t really do much in the way of decision making, you can spot the false answer right away.