Massachusetts Regulator Investigates Firms Selling Private Placements

Secretary of the Commonwealth of Massachusetts, William Francis Galvin, announced in a public statement on July 2, 2018 that his office will be conducting an inquiry into ten brokerage firms within the state of Massachusetts that sell private placements out of concern that the investments are being sold to investors by problematic brokers in the securities industry.
A private placement consists of a sale of securities to a select group of investors in an effort to raise capital. Most often, pensions, mutual funds, banks, insurance companies and other entities comprise the investors involved in the private placement. They are not available to investors in the same manner as through a public offering.
Moreover, private placements are not required to be registered with Securities and Exchange Commission (SEC) due to an exemption from registration referred to Regulation D of the Securities Act of 1933. Rather, Regulation D requires that investors be “accredited.”
Individuals meet accreditation requirements, generally speaking, by having more than $200,000.00 in annual income ($300,000.00 in joint income if the investor is married) or more than $1,000,000.00 in assets. Entities, such as partnerships, corporations and charitable organizations, are required to have more than $5,000,000.00 in assets to become accredited.
Given the lack of regulatory oversight with private placements, there is an elevated risk that investors can be defrauded. Secretary Galvin has stated that “private placements are risky investments that reward the salesperson handsomely with high commissions.” He also opined that the risk of unsuitability with private placements is magnified when dealing with brokers containing a history of disciplinary actions.

Secretary of the Commonwealth of Massachusetts Announces Investigation Into Private Placement Sales

In fact, the Wall Street Journal reported on June 24, 2018, that one of its investigations revealed that securities firms containing a high number of “troubled brokers” are effecting billions worth of private stakes in companies, and seniors are a target. Troubled brokers are often subject of criminal actions, disciplinary actions from regulators like Financial Industry Regulatory Authority (FINRA), and complaints from customers. Private placement sales are also on the rise, as $710,000,000,000.00 in private placements have been sold in 2017 by a collective 1,200 brokerage firms, the Wall Street Journal reported.
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