Understanding Direct Participation Programs (DPPs)
A DPP OR DIRECT PARTICIPATION PROGRAM (OR PLAN) IS AN ALTERNATIVE INVESTMENT THAT PERMITS INVESTORS TO PARTICIPATE DIRECTLY IN A BUSINESS VENTURE’S TAX ADVANTAGES OR CASH FLOW.
Perhaps your financial advisor has approached you about a DPP or you’ve come across the term in researching alternative investments such as REITS (Real Estate Investment Trusts). (Or, in a more unfortunate scenario, perhaps you’re stuck in a DPP and want to understand what you can do to get out of it.) At any rate, the first things you need to know about DPP’s are that they represent a small but growing type of financial security, and that they offer investors an opportunity to own a percentage interest, unit, or share of the actual assets of an operating company.
DPP Investors Are More Than Stockholders--They’re Owners
If you get involved in a DPP, you’re not just a stockholder--you’re an owner. While stockholders do not participate in the net cash flow or tax write-offs of the companies they invest in, DPP investors on the other hand enjoy these benefits of ownership and many more. However, unlike being an actual shot-calling owner of a business, you don’t have to actually go to all the trouble of setting up a business or be an expert in any particular sector or field to enjoy these advantages. To draw a loose analogy, DPP investors are something like silent partners or limited partners. They receive revenues directly from the company, deduct expenses from the business, and often share in the tax benefits provided to the business.
Investors Issues Related to Direct Participation Programs (DPPs)
Generally, DPP investments are available only to “accredited investors.” Among other criteria, accredited investors must have a net worth of at least $1 million or a salary of more than $200,000 for two consecutive years prior to investing. For a full definition of accredited investor, review the SEC’s Rule 501.
Not only are DPPs generally only sold to accredited investors, but DPPs must also meet the SEC and FINRA’s (Financial Industry Regulatory Authority) rules governing suitability for all investors, accredited or no. Because DPPs are typically illiquid investments, financial advisors must be unusually careful when recommending DPPs to clients. Brokers and their brokerages must conduct a proper due diligence investigation into the DPP and the business behind it, and a suitability match must obtain between DPP investors and DPPs. According to FINRA:
Prior to executing a purchase transaction in a direct participation program, a member or person associated with a member shall inform the prospective participant of all pertinent facts relating to the liquidity and marketability of the program during the term of the investment.
When DPPs Go Wrong
Like their cousins, REITs, with whom DPPs always seem to get mentioned, DPPs are not for everyone, particularly because they tend to be quite illiquid as investments. Unfortunately, financial advisors frequently fail to fully grasp or communicate the illiquidity of DPPs. Then, if and when a DPP goes bad, investors naturally want to exit their investment but they find the terms of the DPP forbid it. Not a good situation. As securities attorneys, we’ve seen this situation lead to litigation far too often. So if you’re an investor thinking of getting into a DPP, be sure to ask your financial advisor about the liquidity risks, due diligence research, and suitability.
PA & NJ SECURITIES LAWYERS
If you or anyone you know has been the victim of broker misconduct or investment fraud related to a direct participation program, please contact us immediately for a free consultation at 1-855-462-3330 or via email by clicking here