Structure and Regulation of Direct Participation Program (DPP) Offerings
What a DPP is
A direct participation program is an entity - usually a limited partnership or limited liability company - that is not taxed at the entity level, so income, gains, losses, deductions and credits flow through to the owners. Candidates must sort program types quickly: real estate (raw land, construction, income-producing property), oil and gas (exploratory, developmental, income), equipment leasing, and other finite-life ventures.
Who does what
The sponsor/general partner organizes and manages; limited partners contribute capital, take no management role, and are not personally liable beyond their investment. The dealer-manager assembles the selling group; each selling member owns its own due diligence and suitability work. Programs are often blind pools, self-liquidating, and illiquid - there is no resale market for the units.
How offerings are regulated
Public DPP offerings are registered under the Securities Act, and the underwriting terms and offering documents are filed with FINRA's Corporate Financing Department under Rule 5110, which also demands that compensation be fair and reasonable. Private programs use Regulation D: Rule 506(b) (no general solicitation; unlimited accredited investors plus up to 35 sophisticated non-accredited purchasers) or Rule 506(c) (general solicitation allowed only if every purchaser is accredited and verified). Form D goes to the SEC within 15 days after the first sale, and states impose notice filings.
FINRA Rule 2310 governs member participation: reasonable grounds to believe the program and the customer are suitable, and organization and offering expenses capped at 15% of gross proceeds.
Traps and a rule of thumb
Questions punish candidates who assume partner liability is unlimited, assume losses are currently deductible (at-risk and passive-activity limits apply), or treat tax benefits as the reason to buy. Rule of thumb: on a $20 million offering, organization and offering expenses cannot exceed $3 million.