What are Private Placements? 

Under the Securities Act of 1933 (Securities Act), any offering and selling of a security needs to be registered with the Securities and Exchange Commission (SEC), unless it qualifies for an exemption. Regulation D (Reg D) provides a number of exemptions from the registration requirements. Under Reg D, some companies are allowed to conduct private placements without having to register the offering with the SEC. Reg D provides an exemption only for the transactions in which the securities are offered or sold by the issuer, not for the securities themselves. Only verified accredited investors can participate in a private placement offering.

Recover Investment Losses Involving Fraudulent Private Placements

For help concerning U.S. investments in private placements, contact Riera Law  at 305-204-9779. Our team may be able to help you recover your investment losses from the fraudulent sale of private placements. 

Who is an Accredited Investor?

Private placement offerings are limited to accredited investors who are presumed capable of assessing risks, making investment decisions and fending for themselves without the benefit of regulatory review and registration. Investors must meet the thresholds of an accredited investor, as defined in Rule 501 of Reg D, before they can purchase a private placement. An accredited investor, in the context of a natural person, includes anyone who:

• earned income that exceeded $200,000 (or earned $300,000 together with a spouse or spousal equivalent) in each of the prior two years, and reasonably expects to earn the same level of income in the current year, or
  
  
• has a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence), or
  
  
• holds in good standing a general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82).

Investments in Private Placements Involve a High Degree of Risk 

Private placements are inherently risky investments. Most private placement investments are illiquid, meaning there are limited opportunities for investors to resell the securities. As a result, investors who purchase a private placement may find themselves holding the investment for an indefinite period of time. Private placements are also speculative in nature and have the potential to lose its entire value. 

Besides the inherent risks of these investments, some private placement offerings have also been associated with fraud. Businesses raising capital through private placement offerings are not required to provide as much information to investors as public companies are required to provide under federal securities laws. Because private placements offerings are exempt from registration they are not reviewed by the SEC or FINRA, thus increasing the potential for fraud. Investors should be cautious when investing in a private placement and be vigilant for red flags or misleading statements forbidden by FINRA Rule 2210(d), such as:

• promissory statements or claims such as assertions about the likelihood of a future public offering of the issuer, 
  
  
• claims about the future success of the issuer’s new or untried business model, 
  
  
• inaccurate or misleading assertions concerning the regulation or relative risk of the offering, or 
  
  
• predictions or projections of investment performance

Private placements often present false or misleading information regarding the underlying offering, which could result in significant losses to investors. 

Brokerage Firm’s Due Diligence Obligations

FINRA Regulatory Notice 10-22 provides brokers and brokerage firms guidance regarding their obligation to conduct a reasonable inquiry on private placement offerings prior to recommending them to investor. As part of its inquiry, brokerage firms need to review the private placement memorandum (PPM) including any relevant offering documentation, and independently verify, research or analyze material aspects of the offerings. 

Generally, a brokerage firm “may not rely blindly upon the issuer for information concerning a company.” Brokerage firms also cannot rely on the information provided by the company and its counsel instead of conducting its own reasonable investigation.

Given the risks involved in private placements, FINRA expects firms to establish and maintain adequate supervisory systems to conduct reasonable investigations into private placements to ensure that the investments are suitable for customers and complies with the antifraud provisions or FINRA rules.

Even though investors may be sophisticated and knowledgeable, brokerage firms continue to have the duty to investigate.

Contact Riera Law if You Were Defrauded in a Private Placement Investment 

Contact Riera Law at 305-204-9779 to discuss your fraudulent matter related to a private placement investment. Our team may be able to help pursue a FINRA arbitration claim to recover your investment losses.