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Approximately $5.8 billion are invested in SEC-registered Direct Participation Programs or “DPPs.” [1] This is the result of a remarkable surge in the popularity of DPPs since the 2008-2009 financial crisis. Unfortunately, the growth of the DPP sector has been buoyed by unsuitable sales and improper sales practices. This post explores some of the features of DPPs that make them unsuitable for many investors.

Basic Structure and Features of DPPs

  • Unit investments in DPPs are passive ownership interests in “flow-through” business entities (most commonly limited partnerships and limited liability companies). Unlike stockholders, DPP investors participate directly in the income, expenses, and “tax benefits” (e.g., deductions and credits) of the business because there is no intervening taxation at the entity level.
  • DPPs are offered and sold to the public by DPP “sponsors,” through broker-dealers. Although DPPs are registered with the SEC, they are not publically traded on a securities exchange.
  • Most DPPs are established to fund the purchase of tangible assets like real estate, equipment, oil, gas, and other commodities . The DPP sponsor, or a management company associated with the DPP sponsor, sells, leases, or rents the tangible assets over a prescribed time period (reinvestment phase) in order to generate an income stream for investors. At the end of the reinvestment phase, the DPP enters into a “liquidation phase” during which the assets of the business are sold and liquidation distributions may be made to investors. Distributions received by an investor over the reinvestment and liquidation phases are measured against the investor’s adjusted cost basis to determine capital gains and losses.
  • The time horizon of a typical DPP investment is anywhere from 7 to 15 years.

Risk/Reward Considerations for DPPs

  • DPP sponsors and brokers often tout high-yield income, along with tax and diversification benefits, as reasons to invest in DPPs. To the extent those benefits exist, they come at a substantial cost.
  • DPPs are highly illiquid, which makes them unsuitable for investors who expect to encounter, or are reasonably likely to encounter, uncovered liquidity shortfalls during the term of the DPP project. To the extent that informal secondary markets or redemption opportunities are available at all, they are generally only available to those who are willing to sell at steep discounts.
  • Compared to most short-term investments, long-term, illiquid investments like DPPs are at greater risk of encountering adverse systematic conditions. Cyclical industries, like commodities, equipment, and real estate, tend to be particularly sensitive to such conditions.
  • Non-systematic (company-specific) risks of DPPs are often very difficult to gage because most DPPs are “dark pools,” meaning that the sponsor does not purchase assets or begin operations until after the investments have been made. This makes it impossible for investors to evaluate the quality of the assets and other non-systematic risk factors before they invest.
  • Some DPPs are highly leveraged, which further increases risk for owners.
  • In addition to generally being higher risk investments, DPPs are also extremely expensive in terms of their overall cost to investors. The up-front fees can be as high as 15% to 22% of the investment, and the on-going management fees can be 2% to 3% of the investment.
  • A large portion of the up-front fees, typically 7% to 10% of the investment, goes to the selling broker as a commission. This creates obvious conflicts of interests for the brokers who sell DPPs.
  • DPP sponsors pay brokerage firms to perform “due diligence” on their products, which also creates significant conflicts of interests.

What do the Regulators and Industry Experts have to say about DPPs?

  • FINRA recently filed a complaint against VFG Securities and Jason Bryce Vanclef in which it alleged that “Non-traded DPPs . . . are speculative investments that contain a high degree of risk, including the risk that an investor may lose a substantial portion or all of his or her initial investment.” [2]
  • Securities regulators in Ohio issued a Securities Bulletin relating to DPPs in 2013, which states as follows: “DPPs involve substantial risks, including severe restrictions on liquidity that may lock-in investors indefinitely, complicated corporate structures that pose potential conflicts of interest for management, upfront fees and expenses ranging between 12% – 18% of the initial offering price and substantial ongoing fees thereafter, leverage ratios that may exceed 300% of net assets, and distributions to shareholders paid from borrowings or a return of the shareholder’s investment after deducting fees paid to insiders.” [3]
  • Two well-publicized DPP failures involved equipment leasing trusts: The series of LEAF trusts [4] and the series of ICON leasing trusts. [5] Securities Litigation and Consulting Group calculates that “LEAF program investors lost $515 million by virtue of LEAF’s high costs and conflicts of interest,” [6] and that “ICON program investors lost $1,146 million by virtue of ICON’s high costs and conflicts of interest.” Id.
  • Mika Meyers has represented numerous investors seeking to recover losses arising out of unsuitable DPP investments, including LEAF investments. If you have suffered losses in DPP investments and you would like a free, no-obligation consultation with an experienced attorney, please contact us to schedule an appointment or phone consultation.

Need Assistance?

If you have suffered investment losses as a result of malpractice or misconduct our experienced team of investment fraud attorneys may be able to assist you in recovering some or all of your losses. Call us toll-free at 888-607-4819 for a free consultation or email us through our “Contact” page to schedule a free consultation.

[1] Alternative and Direct Investment Securities Association Comment Letter re DOL Fiduciary Rule



[4] Lease Equity Appreciation Fund I, L.P.; Lease Equity Appreciation Fund II, L.P.; LEAF Equipment Leasing Income Fund III, L.P.; LEAF Equipment Finance Fund 4, L.P.

[5] Icon Income Fund Nine, LLC; Icon Income Fund Ten, LLC; Icon Leasing Fund Eleven, LLC; Icon Leasing Fund Twelve, LLC