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DPP BEST PRACTICES Dana Woodbury, Moderator President, Buttonwood Investment Services Rick Chess Partner, Chess Law Firm, PLC Kirk Michie Partner, Triton.

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Presentation on theme: "DPP BEST PRACTICES Dana Woodbury, Moderator President, Buttonwood Investment Services Rick Chess Partner, Chess Law Firm, PLC Kirk Michie Partner, Triton."— Presentation transcript:



3 Dana Woodbury, Moderator President, Buttonwood Investment Services Rick Chess Partner, Chess Law Firm, PLC Kirk Michie Partner, Triton Pacific Securities, LLC Peter Magnuson Manager, Due Diligence, Securities America

4 Defining terms Understanding the assets classes Learning structures Portfolio implementation Conducting due diligence Economics of the deal Suitability Comparing offerings

5 Due Diligence Sponsor Offering / Programs Asset class Assets

6 Sponsors How Well Capitalized Depth of Management Prior Performance

7 Offering / Programs Viability of Business Plan Does Their Fee Structure Put The Investor First? What are their fees?

8 Asset Class Macro View – Does It Make Sense? Is the Time Right? Is It Geographically Appropriate?

9 Assets Do The Individual Assets Make Sense?

10 Economics of the Offering Risk vs. Return What is investment risk? Are there other more liquid investments? Are there other less expensive investments with comparable Objectives?

11 Risks Investing in DPPs Asset class risk – market cycles Specific asset risk Credit risk Illiquidity Leverage risk Sponsor / Manager risk Key Points to Consider: 1.Judge an investment primary on its economics and secondary on its tax benefits. 2.Prior performance doesn’t guarantee future results – but should be reviewed. 3.Like in traditional investments generally, the more risk the more return.

12 Rules and Regulations that apply to DPPs FINRA 11-02: Know your customer FINRA 10-22: Reg. D regulation and Due Diligence FINRA 09-27: Member private offerings NASD 05-18: Private placement of TICs NASD Rule 2310/FINRA 10-22: Suitability Many more…..

13 Suitability FINRA Rule 2111 replaced NASD Rule 2030 (Effective October 2011) New Suitability Framework – 3 obligations Reasonable basis – suitable for some investors – reasonable investigation required. Customer specific – suitable for that investor based on profile factors Quantitative – series of transactions Recommendation trigger – facts/circumstances

14 Suitability Analysis Net worth & Income: Accredited, Qualified and Institutional Position: Asset allocation, age, experience, time, liquidity needs, risk tolerance, etc. BD/Rep: Reasonable basis RIA/IAR: Fiduciary duty (clients best interest) State: Regulations and limitations

15 Suitability Basic Suitability for Public non-traded Alternatives 1.A minimum net worth (exclusive of home, home furnishings, and personal automobiles) of at least $250,000 or 2.A minimum net worth (as previously described) of at least $70,000 and a minimum annual gross income of at least $70,000. Certain states may have additional requirements or concentration limitations.

16 Suitability – Accredited Investor 1.A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person; 2.A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or 3.A trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes. 4.A bank, insurance company, registered investment company, business development company, or small business investment company; 5.An employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million; 6.A charitable organization, corporation, or partnership with assets exceeding $5 million; 7.A director, executive officer, or general partner of the company selling the securities; 8.A business in which all the equity owners are accredited investors

17 Rules and Regulations for Reg. D While Regulation D securities are exempt from SEC registration they still have many rules and regulations that must followed: Anti-fraud provisions Blue Sky laws Form D filing with SEC PPMs numbered/tracked Private Placement selling restrictions

18 General Solicitation – JOBS Act JOBS Act Directs the SEC to amend rule to permit general solicitation of offerings exempted from registration (Reg. D offerings) SEC Rule Issuer takes reasonable steps to verify that investors are accredited, and All investors actually are accredited or the issuer reasonably believes so at the time of sale

19 Potential Investor Benefits Portfolio Diversification Traditionally a negative correlation with the value of more liquid securities (e.g., stocks) Reduced Portfolio Volatility Investor risk is effectively spread among multiple assets Inflation Hedge Many alternative investments are hard assets which general rise with inflation Cash Flow for Income Underlying assets generates income at rates in excess of prevailing interest rates Growth for Total Return Underlying assets may appreciate over the term of the investment providing capital appreciation. Capital Preservation Underlying assets are often hard assets (sometimes insured) or may be investments in a senior position or with collateral.

20 Potential Tax Benefits Avoid double taxation of stock 1.REITs 2.BDCs 3.Partnership structure subject to Subchapter K (i.e., not subject to entity-level income tax before flow through /distribution to investors). Tax deferral through Section 1031 like-kind exchange Investors may be able to exchange their interest in the entity for other interests in a Section 1031 like-kind exchange. Investors generally take a basis in new investment equal to their basis in the old investment rather than pay tax on the exchange. Depreciation Depending on the underlying investment property, investors may receive a share of depreciation deductions.

21 Potential Tax Benefits Passive Income / Losses Investors will generally be deemed to receive passive income or losses. Passive losses may only be applied against passive income, but any excess passive losses are carried over to the next year. Drilling Costs and Depletion from Energy Based Investments Intangible Drilling Costs (labor, chemicals, etc.) – 100% deductible during first year (I.R.C. 263) Tangible Drilling Costs (equipment) – 100% deductible over seven-year useful life (I.R.C. 263) Tax Credits / Incentives from States or Federal Government Low-Income / Affordable Housing Historic Building Restoration Alternative or Green Energy

22 Fees Front-End Load Sales Commissions Offering & Organization Legal Printing Sponsor Due Diligence Wholesaler Commissions

23 More Fees Operational Property Management Asset Management Legal Printing Sponsor Due Diligence Construction Fees Leasing commissions & tenant improvements Capital expenditures NNN vs. NN vs. N

24 And More Fees Liquidation Brokerage fees Internalization fees Advisor Board of Directors Sponsor Listing Fees Profit Sharing

25 Securities licensing for DPPs Series 7 – General Securities & REITs & BDCs Series 22 – Private DPPs Series 62 – Corporate Securities Series 63 – State Registration Series 65 - RIA

26 Obtaining your DPP Designation Earn the Direct Participation Professional (DPP) designation – Eight (8) credit hours Two required core classes Fundamentals of Direct Participation Programs (1 DPP credit) Best Practices in Direct Participation Programs (1 DPP credit)



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