FINRA Reminds Investors to Evaluate the Risks of Private Placements

Private placements are securities in non-public offerings that are exempt from registration under the federal securities laws. Billions of dollars are raised each year by selling these securities. Private placements can be a good source of capital for American businesses, especially start-up companies. However, investing in private placements is risky business and can tie up your money for a long time making it illiquid. And as FINRA reminds us in a recent article on the risks of private placements, you can also lose some or all of your money.

FINRA has uncovered fraud and sales practices regarding sellers of private placements providing inaccurate statements. Materials may be omitted necessary to make informed investment decisions, and some firms may not have conducted adequate investigations.

There could be very limited information about the issuer and management, and limited financial reporting. The offering document, called a private placement memorandum or term sheet, likely will contain limited information on the company's business. Since many private placements are issued by companies that are not required to file financial reports, the investor may have problems finding out about the company.

Generally an investor in private placements must be an "accredited investor." This means that you must have a net worth, excluding your primary residence, of over $1 million—either alone or with your spouse. Or, you must have income exceeding $200,000 over the last two years, $300,000 with a spouse, along with a reasonable expectations that you will continue on with the same earnings.

However, as FINRA reminds us, oftentimes private placements are not just offered to accredited investors. If you don't meet the net worth or income criteria, you may still be asked to invest as a "non-accredited investor." Private placement securities are considered "restricted" securities and cannot be resold without registration or an exemption from registration. These features that make them difficult to sell or "illiquid" and may negatively impact the price at which the investor is able to sell them. Remember, the issuer typically does not have an obligation to provide liquidity to investors by buying the securities back when the investor wants to sell.

Some Tips from FINRA on Private Placement

1. Find out as much as you can about the company's business, including the industry in which it operates to make an informed decision. Are comfortable getting limited information for the duration of the investment? Understand if, how, and when, you are able to liquidate your private placement securities.

2. Expect your broker to be knowledgeable about any risks associated with the company's business. Ask the broker what information he or she was able to review about the issuing company and this private placement.

3. How does this investment fit in the mix of other investments you hold, or align with your risk profile? Discuss any paperwork you are given to sign about a private placement with your broker, and why such an investment is right for you.

4. Carefully review any private placement memorandum or other offering document. The offering document, and any sales materials associated with the private placement, should be detailed and balanced. If you don't understand them, don't invest. Always make sure you have a copy of the offering document.

5. FINRA suggests reading the issuing company's Form D, if available on the SEC's EDGAR database. It contains limited financial information, and identifies the company's executives and describes other matters that can be valuable. You can also contact your state securities regulator for information.

6. Ask about the schedule and source of investor distributions for real estate private placements and find out if the company's income is able to cover the distributions, or if distributions may be made from proceeds from sales of additional shares or borrowings.

7. With oil and gas private placements, find out what you can expect to receive in return for your investment, and the circumstances that would result in a loss of some or all of your investment. Has the issuer has entered into any operational or services agreements with affiliates? What about the issuer's past performance in prior offerings? Review the map of the proposed well locations for drilling activity, whether they have been successful or not, in the vicinity. Ask how and when you will be informed of the status of the drilling efforts and whether or not audited financials of the offering will be provided.

8. Is the private placement being sold on a conditional or contingency basis? These types of private placements are designed to be concluded only when certain conditions are met. There should be specific information regarding whether the proceeds from sales of securities received prior to the contingency being satisfied may be accessed by the issuer. The offering document should clearly state that investors will be refunded their investment amount if any specified conditions or contingencies are not met. If there are no contingencies, be very careful.

9. If you hear about private placements through spam emails or cold calling, be extremely wary because very often they are fraudulent. A legitimate investment salesperson must be properly licensed, and his or her firm must be registered with FINRA, the SEC and a state securities regulator—depending on the type of business the firm conducts. Check the background of a broker or investment adviser, on FINRA's BrokerCheck. If you suspect fraud or believe you are being treated unfairly by a securities professional or firm, you may file a Complaint with FINRA.

10. FINRA reminds all investors to ask and check. Ask if the investment professional selling the private placement is registered with FINRA or the SEC. Then make sure to check to see if this is in fact the case.

This valuable information was available on FINRA's website.

If you have sustained investment losses due to your stock broker or financial advisor’s recommendations in private placements, or other illiquid, complex products, call for a free consultation on how to potentially recover your losses. To speak with an attorney call Soreide Law Group at 888-760-6552 or visit our website at: https://www.securitieslawyer.com.