Private placement involves securities that are not sold through public offering. These securities are instead sold to a small number of specifically chosen investors. Non-public offerings can be an important source of capital for U.S. businesses – especially small enterprises and start-ups. However, private placement investments can also be risky and tie an investor’s money up for a long period of time.
Some advisors issue promissory notes as a kind of private placement, but they are typically very speculative and therefore high-risk – and those risks are often expensive and difficult to identify. They often involve conflicts of interest due to sponsors doing business with affiliated entities. Notoriously difficult to sell, they have no ready-market, they aren’t publicly traded and there is no secondary market. An investor’s money can be tied up for year with these types of private placements.
Private placements don’t have to register with the Securities and Exchange Commission (SEC), meaning they can operate outside of SEC regulations. For this reason, the SEC warns investors that fraudsters can use unregistered offerings to get away with investment scams. On top of scams, firms and brokers may omit material facts regarding investment decisions, release inaccurate statements to investors, or fail to adequately determine whether private placements are suitable for clients.
If you’ve lost a great deal of money after investing in private placements or promissory notes and believe a fraudulent or dishonest broker or firm is to blame, find out if you have grounds for arbitration through the Financial Industry Regulatory Authority.
Private Placement Fraud and Sales Abuse
The Financial Industry Regulatory Authority (FINRA) warns potential investors to exercise due diligence when choosing to invest in private placements. FINRA recently uncovered private placement fraud and sales practice abuses, in which brokerage firms and individuals gave investors sales materials and memos that contained inaccurate statements.
By omitting pertinent information and misrepresenting facts, these entities made it impossible for investors to make informed decisions, leading to significant losses.
Protecting yourself and your investments from fraudsters requires vigilance. The best way to avoid someone defrauding you is to educate yourself on private placements and to do your own research. FINRA gives investors a few tips for protecting against private placements fraud and abuse:
- Find out as much as possible about the company and industry before investing. Ask yourself if you’re comfortable receiving limited information during the investment. Learn when and how you can liquidate your private placement securities.
- Ask your securities broker what information he or she has obtained about the issuing company. Your broker should be knowledgeable about risk factors inherent to the company’s business or industry and to the private placement, itself.
- Ask your broker how a private placement aligns with your current risk profile and other investments. Don’t invest without first having a one-on-one conversation with your broker about why this is the right choice for you.
- Carefully review private placement documents. Statements your broker makes should be consistent with offering documents. They should be balanced, detailed, and easy for you to understand.
- Be extremely cautious of private placements that unknown people promote via spam emails or cold calls. These sales tactics are common tools for fraudsters. Check the background of the promoter or broker. He/she should have proper licensure and SEC registration.
Always ask questions and check facts before making any type of investment. Don’t let high-pressure language or “act now” gimmicks push you into making a decision for which you aren’t prepared. Speak with a trusted financial advisor or registered securities broker to ensure you’re making the best decision for your portfolio with private placements.
Contact Erez Law: National Broker Misconduct Attorneys
If you believe you’re a victim of fraud or misconduct when dealing with promissory notes or private placements, contact the investment fraud lawyers at Erez Law to discuss your situation. If you aren’t sure what happened but suffered an abrupt and significant loss, call our team. With more than 30 years of experience, we know how to recognize securities fraud and can help you understand your rights as a harmed investor.