If your broker offered you an investment opportunity through a private placement, they have a legal obligation to conduct due diligence. The due diligence process helps to confirm the company’s legitimacy and the opportunity’s suitability for your risk tolerance and financial goals. Conducting due diligence in private placements can help you obtain the information you need to make an informed investment decision. Without proper due diligence, you could suffer significant financial losses.
What Is Due Diligence in Private Placements?
Due diligence in private placements refers to the process of requesting and reviewing documents from a business that is soliciting investment through a private placement—an offering of unregistered securities that cannot trade publicly. Because it lacks a public registration statement, a private placement offering instead targets specific investors, sometimes without any public advertising.
When a company publicly registers its securities, it must disclose a wide range of information about its operations, finances, projected performance, and potential risks. However, a private placement may have less stringent disclosure requirements, depending on the type of registration exemption an offeror relies on. Some types of private placements target sophisticated investors, and they are not suitable for all investors. A due diligence analysis allows broker-dealers and investors to request and review critical information.
How Our Experienced Private Placement Fraud Attorneys Can Help You
The private placement attorneys with Erez Law PLLC can help if you have suffered significant financial losses due to investment fraud caused by due diligence failures. Our nationally recognized firm has recovered over $300 million for investors who have lost money due to fraudulent conduct by brokers. We have successfully resolved thousands of cases involving investment fraud and FINRA matters. Our lawyers have over 35 years of experience representing investors, giving us an extensive knowledge of securities and investment law and a deep understanding of FINRA and other securities arbitration procedures.
As one client wrote of our services:
“Jeff Erez and his team delivered an outstanding result for my wife and me concerning a claim that is by any objective standard a substantial one! Jeff is a lawyer’s lawyer and led a skilled team throughout a multi-year process. He was always available consistently with the schedule of a busy trial lawyer and was always able to answer questions and accurately manage expectations. His support staff and professional colleagues are all first-rate. I am a former public company general counsel and am pleased to report that Jeff is a skilled and persuasive advocate with loads of financial acumen. And he has tons of experience and positive relationships in a plaintiff securities bar that is truly a small world unto itself. We feel so lucky to have found him!”
When you hire Erez Law PLLC to represent you in a private placement case, you can expect our legal team to:
- Thoroughly investigate your claim to gather evidence to build a compelling case to hold brokerage firms or other parties liable for your losses
- Work with financial and economic experts to develop persuasive arguments for technical issues in your case
- Negotiate with brokerage firms or other parties to settle your claims
- File a statement of claim with FINRA to initiate an arbitration of your investment fraud claim
- Select arbitrators who will handle your case fairly
- Prepare your case for arbitration
- Represent your financial interests at every stage of your case
Key Steps in Conducting Due Diligence
Conducting due diligence in private placements involves several steps, including:
- Reviewing the offering documents: A company conducting a private placement should provide prospective investors with a private placement memorandum or other offering documents. The offering documents should inform potential investors about various aspects of the offering, including the objectives, risks, and terms of the investment; the company’s financials; biographies of the company’s management and advisors; and a detailed description of the business.
- Reviewing the company’s financial statements: Broker-dealers should conduct a thorough analysis of a company’s financial documents, including balance sheets, profit-and-loss statements, cash flow statements, and financial projections. The information in a company’s financial documents should align from document to document. Financial projections should also have a reasonable basis in the company’s past performance or adequate justification based on market conditions or the performance of comparators.
- Reviewing the company leadership’s backgrounds: Investors should also review the biographies of the company’s management and advisors to ensure the business has competent leadership capable of achieving success.
- Assessing risk disclosures: Private placement documents should also describe the potential risks of the investment, including reasons the business may fail and any legal issues the company faces, such as government investigations or lawsuits.
Conducting due diligence can uncover misconduct, exaggerations, or misrepresentations by an offeror in a private placement, helping you avoid losing money on a potential investment. In contrast, failing to conduct financial due diligence can jeopardize your financial health.
Common Red Flags in Private Placements
Investors should watch out for the following red flags that may signal unsuitability or potential misconduct associated with a private placement:
- Promises of unrealistic returns or guarantees of beating the returns of the S&P 500 or Dow Jones
- Misrepresentations regarding the liquidity of the investment
- Over-inflated valuation or a valuation that does not reasonably align with the company’s performance or market conditions
- Lack of transparency from the offeror or broker, including delaying responses to questions or providing confusing or non-responsive answers
- Offering unregistered securities without an explicit assertion of an exception to registration (i.e., Reg A, Reg C, or Reg D)
- Aggressive sales tactics
- Unsolicited offers from brokers with whom you do not have a prior relationship
- Inadequate professional vetting, such as a lack of audits by accounting firms
- Offers made by unlicensed brokers
- Missing or incomplete offering documents
Contact Erez Law to Speak with a Private Placement Fraud Lawyer
Thorough due diligence can identify potential issues and help with informed decision-making that best protects your financial interests. Unfortunately, not all brokers perform this critical financial analysis adequately. Contact Erez Law PLLC today for a confidential consultation with an experienced attorney to learn how we can assist you with legal due diligence for private securities.