Series 22 Exam Lesson 6 Direct Participation Programs (DPP): 2021

Lesson 6 Direct Participation Programs (DPP):

There are many types of DPPs:
Agriculture
Livestock
Equipment
Commodities
Venture Capital
Entertainment

You need to understand how each of the DPPs works so that you can make the best recommendation possible to your clients. This means understanding the objectives of each types, the risks associated with each type, and the operational realities of each type.
There are three stages in most DPPs:

The Organization and Offering Stage: In this stage the organizer sets up the legal structure of the DPP and files paperwork with the SEC. The DPP is then offered to investors and these prospective investors are offered a variety of documentation. Interest in the DPP is sold to qualified investors.

The Operating Stage: The assets are acquired, the business is run, and the business is conducted according to the objectives of the DPP. This happens for a limited time, which is set down in the partnership agreement.

The Liquidation Stage: If the expiration date is reached or the partnership achieves its goals earlier, liquidation of the partnership’s assets occurs. The assets are sold, any liabilities are paid off, and then the final distribution of money is made to partners according to the terms of the agreement.

Agricultural programs can include food, building materials. There are many “raw material/row crops” sort of foods, like corn, wheat, and soybeans, that are then refined into more complex food. A DPP can invest in these row crops, which provides a steady, predictable income. It is dependent on how well a crop does in any given year. They can be influenced by weather condition, infestations, and other issues.
Usually, crops are planted and harvested at the same time every year. Farmers typically sell the same kind of crops during the same time of year.
Often these DPPs, will buy up large swaths of farmland, and lease or sell individual lots to farmers as a way to turn a profit.
Some DPPs invest in timber, which has the advantage of not being a perishable commodity like most crops are. They have much greater flexibility about storing their products and selling them at different times. They do not have to be forced to sell at depressed prices, as sometimes happens with crops. Trees, however, present a long-term investment. Forests have to be cultivated over a number of years, and trees take a while to reach their greatest potential. In the meantime, trees do not produce any income. This only comes at the end when they are finally harvested.
The price of timberland generally increases as time passes, because the trees grow and this provides more wood. This makes it a great hedge against inflation.
A forest management company needs to be involved in this kind of operation, and often the general partner in such as DPP is a forest management company. These companies provide services, such as appraising the land and timber, harvesting the timber, selling the timber, and planting new trees. (Reforesting) They make sure that the partnership receives a fair price for the lumber during the liquidation phase of the partnership.
There is a risk involved that a partnership initially pays too much for the land and so will not be able to recoup their investment.
Another type of agricultural program is livestock/cattle. These can be animals to sell to meat packing companies, dairy cows that produce milk, feeder-cattle (breeding cattle), etc. The feedlot is the place where they raise the cattle. They charge a fee to have investors keep their cattle there. This is sometimes known as a cattle growing operation.
The person who operates the feedlot takes care of the cattle, feeds them, weighs them, vaccinates them and tags them to keep them apart from other people’s cattle. They arrive at a lower weight and will be fed until they have reached their full weight.
Prices for cattle can be volatile and so any cattle programs that are offered to the public have to meet certain requirements, such as being between 3-10 years, having a uniform business plan, having sufficient capital, and having a sponsor with at least five years experience with this kind of program.
The sponsor of a cattle program has to maintain a minimum investment of $100,000 if the program is worth $1 million or more. If it is less than that, they have to maintain at least a 10% investment.
Sponsors are required to create reports about the program annually. The report has to include: income, expenses, assets, liabilities, profits, and losses.
One of the biggest risks for livestock is disease and death of the livestock. Injuries and sickness simply happen to living creatures. Mortality insurance can be purchased on the herd. This insures against a mortality rate greater than 4% of the totally herd for as long as the program lasts. It protects against employe negligence and misconduct.
When raising dairy cattle, there are eight different stages:

Reading the new cattle.
Milking the cattle twice a day.
Storing the milk in a cool place.
Transporting the milk in special transports.
Testing the milk in a lab.
Processing the raw milk (pasteurizing and homogenizing)
Packaging the milk in various grades (skim, whole, etc.)
Selling the milk to stores and consumers

The dairy farmer wants a steady stream of income from selling milk, unlike the cattle grower who has to wait until he cattle mature to butcher and sell them. They have many overhead costs, including equipment, wages, caring and feeding for the animals, insurance, etc.

There are different kinds of cows:
Heifer: Female cow younger than 3 years old that has not had offspring.
A dairy cow: Female cow that has offspring
Bull: Male cow
Steer: Castrated male cow
Holstein cow: Dairy cow that produces the highest milk quality
Calf: Baby cow