Distribution Reinvestment Plan

Ferngrove Timber Program's prospectus offers a distribution reinvestment plan (DRIP) under which investors may use cash distributions to purchase additional units. The DRIP purchase price is set under a separate formula stated in the prospectus and, in this program, does not equal the original fixed public offering price. Is this permissible?

1. A.Yes -- nothing requires the DRIP purchase price to equal the original subscription price; the DRIP price is whatever separate method the prospectus discloses.Correct. The DRIP price is an independently disclosed term, not required to match the original offering price.
2. B.No -- all purchases of units in the program, whether by new subscription or reinvestment, must occur at the same fixed public offering price.Wrong. The DRIP price is a separate, independently disclosed formula.
3. C.Yes, but only if the DRIP price is higher than the original offering price, to prevent diluting the sponsor's compensation.Wrong. There is no rule requiring the DRIP price to be higher than the original offering price.
4. D.No -- a DRIP may only be used to reinvest distributions into a different program, never into additional units of the same program.Wrong. A DRIP typically reinvests distributions into additional units of the same program.

Why: Nothing requires a DRIP purchase price to equal the original subscription price. The DRIP price is whatever separate method the prospectus discloses for reinvestment purchases.

A program offers a distribution reinvestment plan under which a participating investor's share of what would otherwise be a cash distribution is instead used to purchase additional units in the program. How does this differ from an assessment?

1. A.They are functionally identical, since both result in the investor holding a larger stake in the program funded by money connected to her existing investmentWrong. The source of the money differs -- one redirects money already owed to the investor, while the other calls for genuinely new money.
2. B.A distribution reinvestment plan is mandatory for all investors once a program adopts it, while an assessment is always optionalWrong. Distribution reinvestment plans are typically elective for each investor, not mandatory once adopted.
3. C.An assessment increases an investor's ownership percentage, while a distribution reinvestment plan has no effect on ownership percentage at allWrong. A distribution reinvestment plan also increases the participating investor's stake, since it purchases additional units.
4. D.A distribution reinvestment plan redirects cash the investor was already entitled to receive from the program, while an assessment calls for new money from the investor beyond what the program otherwise owes herCorrect. The key distinction is the source of the funds -- money already owed to the investor versus genuinely new money called from her.

Why: A distribution reinvestment plan redirects cash the investor was already entitled to receive from the program, while an assessment calls for new money from the investor beyond what the program otherwise owes her.

Ferngrove Timber Program has three distinct per-unit dollar figures active at the same time: a $1,000 original fixed public offering price for new cash subscriptions, a $1,080 DRIP reinvestment price based on a current-value formula, and a $960 repurchase price based on a separate appraisal used for the share repurchase plan. A new investor, a reinvesting investor, and an investor requesting redemption each ask what price applies to them. Which price applies to each, respectively?

1. A.All three investors receive the same $1,000 price, because a program may only maintain one official per-unit price at any given time.Wrong. A program can and commonly does maintain separate, independently disclosed prices for different transaction types simultaneously.
2. B.New cash subscription: $960 repurchase price. Distribution reinvestment: $1,000 offering price. Redemption request: $1,080 DRIP price -- with each type of transaction using the next lower price in sequence.Wrong. This assigns every price to the wrong transaction type.
3. C.New cash subscription: $1,000 offering price. Distribution reinvestment: $1,080 DRIP price. Redemption request: $960 repurchase price -- each transaction type uses its own independently disclosed pricing basis.Correct. Each of the three transaction types is governed by its own separately disclosed price.
4. D.New cash subscription: $1,000 offering price. Distribution reinvestment: $960 repurchase price. Redemption request: $1,080 DRIP price -- reinvestment and redemption use each other's pricing basis.Wrong. This swaps the DRIP and repurchase prices between the two transaction types.

Why: Each transaction type uses its own independently disclosed pricing basis: new cash subscriptions use the $1,000 offering price, distribution reinvestment uses the $1,080 DRIP price, and redemption requests use the $960 repurchase price.