Pooled funds aren’t uncommon in investing. Traded, pooled funds include mutual funds, exchange-traded funds (ETFs) and hedge funds. However, some pooled funds avoid market trading, including direct participation programs (DPPs). Here’s what you need to know about DPPs.What Are Direct Participation Programs (DPPs)?
If you’re seeking non-traded pooled investments, DPPs could help. They invest in real estate or energy for the long term, usually upwards of 10 years.
While you can actively trade mutual funds and other types of investments, DPPs have passive management. Non-listed real estate investment trusts (REITs), oil and gas programs, and non-listed business development companies all qualify as DPPs.
To participate, members will buy in to access the DPP’s benefits. A limited partnership, a general partnership or an S corporation subchapter usually organizes the purchase. This setup means the DPP doesn’t pay any corporate tax since income, credits and others are passed through to the partner.
Since DPPs aren’t traded, they aren’t liquid — at least for the duration of the program. Since they’re not publicly traded on the stock market, you might be missing some important company disclosures that would otherwise come with a publicly-traded company. Clients are required to meet certain income and asset thresholds to participate in buying DPPs. Those requirements can vary by state and even the program.DPP Structure
DPPs first appeared in the Securities Act of 1933. They’re also built into Financial Industry Regulatory Authority (FINRA) Rule 2310. If a financial professional takes the Series 7 exam, questions about DPPs will feature prominently.
Since limited partners invest in DPPs, investors only risk the amount they’ve invested. A general partner manages the investment. Limited partners can change or fire that general partner. Also, they can sue a general partner if they act against the wishes of the limited partners. However, limited partners can’t manage a DPP and don’t receive payment or dividends for running the DPP.DPPs: Pros and Cons
Since these aren’t your typical investment securities, there are a few good — and bad — things to know about DPPs.Pros
If you’re considering jumping into alternative investments, like direct participation programs, you might be able to boost your income. Through decent returns and little stock market exposure, you could invest in real estate, business development companies and even oil and gas programs.
But keep in mind you’re in it for the long-term. You can’t liquidate DPPs for the duration of their program life. If you’re hoping to build up your cash quickly — within a few months or a couple years, this might not be the best investment for you. Meanwhile, consider alternative options, like the stock market or high-yield savings accounts.Investment Tips
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