private placement investment

Lose Money in a Private Placement Investment?

Jul 20, 2020

Private Placements are Risky  As an individual investor, you may be offered an opportunity to invest in an unregistered offering or private placement. You may be told that you are being given an exclusive opportunity. You may have seen an advertisement regarding the opportunity. The securities involved may be, among other things, common or preferred stock, a REIT, a limited partnership, a membership interest in a limited liability company, or an investment product such as a note or bond. Private securities offerings are generally limited by law to certain institutional and high net worth investors called “accredited investors”. This limitation exists because of the greater risks involved in private offerings as compared to, for example, investing in a publicly-traded stock. Keep in mind that private placements can be very risky and any investment may be difficult, if not virtually impossible to sell.     A private placement is a securities offering that is exempt from registration with the SEC, and is also referred to as an “unregistered offering.” For the most part, private placements are not subject to some of the laws and regulations that are designed to protect investors, such as the comprehensive disclosure requirements that apply to registered offerings. Private and public companies engage in private placements to raise funds from investors. Hedge funds and other private funds also engage in private placements.  How do I know if I Bought a Private Placement or Unregistered Security? Unregistered offerings often can be identified by capitalized legends placed on the offering documents and on the certificates or other instruments that represent the securities. The legends will state that the offering has not been registered with the SEC and the securities have restrictions on their transfer. You should read the offering documents carefully to understand the risks involved, and the broker must make fair and balanced communications to you when  Earlier this month, the Financial Industry Regulatory Authority (“FINRA”) issued guidance to brokerage firms on communicating with retail customers about private placement offerings. It found that there were problems with the way firms communicated the risks of private placements to their retail customers making those communications misleading.  Private Placement Retail Communications Due to the fact that many brokers were not providing complete information on the risks of private placements when communicating with investors, FINRA provided guidance to brokers focused on disclosures regarding risk to the retail investor. The new guidance notes that in FINRA’s recent reviews of retail communications concerning private placement offerings found certain deficiencies including the failure of member firms to balance claims of potential investment benefits with the disclosure of risks.  FINRA reminded the brokers that  Rule 2210(d)(1) requires the following: 1. That all member firm communications be fair, balanced, and not misleading. 2. Communications that promote the potential rewards of investment also must disclose the associated risks in a balanced manner. 3. Communications must be accurate and provide a sound basis to evaluate the facts with respect to the products or services discussed. 4. It prohibits false, misleading, or promissory statements or claims, as well as and the publication, circulation, or distribution of communication that a member firm knows […]

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