FINRA Rule 2310: Direct Participation Programs and REITs Must Disclose Estimated Value

Alternative securities like direct participation programs and REITs are extremely risky. Non-traded REITs and DPPs do not publish their share prices on the stock exchange, making them impossible for investors to assess on their own. In 2016, Regulatory Notice 15-02 amended FINRA Rule 2310 to include the requirement that brokers provide investors provide the per share estimated value of their DPP or REIT in an annual report.

Because REITs and DPPs are often “unlisted,” “private,” or “non-traded,” investors often have no idea what their shares are worth. Stockbrokers typically earn large commissions on alternative investments, creating an incentive to recommend these products even when they do not suit the investor’s needs.

If you receive the per share estimated value and it does not meet your expectations,

contact the securities attorneys of Kurta Law. You should also contact an investment attorney if your stockbroker did not provide you with the per-share estimated value of an investment that lost money.

What is a DPP?

Direct private placements invest in privately held companies. Because the companies are privately held, investors cannot access information about their financials and therefore rely on their brokers’ assessments.

What is a REIT?

Real Estate Investment Trusts (REITs) are a type of direct participation program. REITs allow investors to buy shares of portfolios of real estate without having to purchase or manage real estate. Non-traded REITs—also known as “private REITs” or “unlisted REITs”—can be especially risky because they do not trade on a public exchange. Investors must trust that their broker has performed their due diligence and has their best interests in mind.

Risks Associated with REITs and DPPs

Shares of REITs and DPPs are highly illiquid, and investors may be expected to keep their money in the DPP for years. Investors who want to withdraw their money early may be expected to pay a significant fee. If you encounter unexpected withdrawal fees associated with your DPP or REIT, you should speak with an investment lawyer.

FINRA Rule 2310

Brokers are required to inform their investors about the liquidity and marketability of the DPP or REIT.

Before recommending REITs and DPPs to investors, brokers must obtain the following facts about the investment:

• Physical properties
• Tax aspects
• Financial stability of the sponsor
• The program’s conflict and risk factors

All these elements should factor into a broker’s recommendation.

Calculation of Per Share Estimated Value

Brokerage firms can calculate the per share estimated value using either the net investment methodology or the appraised value methodology. The disclosure must also include an explanation of the method used to value the shares and the date of the valuation.

• Net investment methodology: This method calculates the value of shares available for investment.
• Appraised value methodology: Investors use the valuation disclosed in the issuer’s most recent report filed with the SEC.

Return of Capital vs. Return on Investment

Under the RN 15-02 amendment, firms that use the “net investment” methodology must inform investors if part of their distribution is a return on their capital investment rather than a return on their investment.

What Can I Do If I Lost Money on a DPP or REIT?

Investors should contact a securities attorney if they lost money on an alternative investment, especially if they were not aware of the risks associated with REITs and DPPs. Contact Kurta Law if you have questions about your DPP or REIT investment: (877) 600-0098.