Chapter One
Direct Participation Programs and Their Characteristics
A direct participation program (DPP) is an investment vehicle that businesses create to raise funds for financing specific aspects of their business operations. Typically, these programs involve the acquisition of hard assets, such as oil and gas, real estate, heavy equipment, or cattle. Programs generally have a clearly defined business objective, a specific plan of action, and a termination date. Businesses sponsor a DPP to spread a program’s immense risks to outside investors. DPP investors are enticed by the equally immense rewards for a successful program, and the promise of various tax benefits.
A Pass-Through Entity. As a program, a DPP is not itself a business entity, but it takes the shape of one entity or another for legal and income tax purposes. The only entities it may assume are those that provide their investors with “pass-through” tax consequences. A pass-through entity is one whose cash flows and tax liabilities are passed directly to the program’s investors and not to the program or business entity itself. The business pays no taxes on its earnings; its investors do. Tax deductions and credits are likewise passed directly to the investor. Among other things, this means that a DPP cannot be a corporation.
But not every pass-through entity is a DPP. DPPs must be principally composed of passive investors, investors who risk their money but cannot influence or participate in the operation of the business. Nor may DPPs offer securities that trade on a public exchange. DPPs are therefore generally illiquid investments. These two restriction