Investing in unregistered securities carries considerable risk, which is why private placement offerings are not suitable for every investor. Under federal securities laws, financial advisors and brokers are required to thoroughly explain the potential outcomes to their clients, enabling them to make informed decisions about where to invest their money. Additionally, they must have a reasonable basis for the investment recommendation, conduct reasonable investigations into the issuers and the securities they recommend in private offerings made under Regulation D, and complete a best interest and suitability analysis. When investment professionals misrepresent material facts about an offering or fail to fulfill their obligations under securities laws, their clients might decide to invest when they otherwise would not, which can expose them to unanticipated risks.
Have you lost money because of a broker’s misrepresentation in a private placement offering? If so, Erez Law PLLC can fight to recover the compensation you deserve for your losses and to hold your broker accountable for their negligence. Our firm has over 35 years of experience representing investors and a proven track record that includes more than $200 million in compensation recovered for our clients, including in over 50 FINRA arbitrations that have been tried. Contact us today for an initial case evaluation with an investment fraud lawyer for private placement, and let’s discuss your matter together.
Overview of Private Placement Offerings
In a private placement offering, a company raises capital by offering securities directly to a select group of investors, which may include institutional investors (e.g., pension funds or mutual funds), private equity firms, venture capitalists, or angel investor groups, rather than offering securities to the public through a public offering. Companies may pursue private placement offerings to avoid the more complex rules and requirements applicable to public offerings.
In many cases, private placement securities are pitched to “accredited investors” – individuals with a certain level of financial resources or those who possess sophisticated financial experience. When a company undertakes a private placement offering, it must provide potential investors with a private placement memorandum, which provides details about the offering and the company’s financial and operational condition.
How a Private Placement Fraud Attorney Can Help
Have you lost money in a private placement investment because your broker misled you about material details of the offering? If so, a trusted securities fraud attorney from Erez Law PLLC can help you pursue financial recovery by:
- Thoroughly investigating to recover evidence of inadequate disclosures or misrepresentations, including private placement memoranda, advertising materials from the brokerage firm, and written or email communications from brokers
- Documenting your financial losses and other expenses, including excessive broker commissions or management fees
- Working with experts to build a compelling case
- Negotiating with liable brokers and brokerage firms to pursue a fair and full settlement of your claims
- Preparing and filing a statement of claim to seek arbitration through the Financial Industry Regulatory Authority (FINRA)
- Handling all the aspects of a FINRA arbitration, including selecting arbiters, preparing evidence and arguments for the hearing, and presenting a compelling case to the arbiter
If you believe that your broker-dealer misled you about a private offering, contact a private placement fraud lawyer from our law firm. We offer a free consultation where we can discuss your situation and whether you have a viable claim to seek compensation for the significant losses you sustained.
Failing to Conduct Reasonable Investigations
Because private placements are exempt from registration, broker-dealers have a heightened duty to investors to protect them from these highly speculative and often illiquid investments. Brokerage firms must perform thorough due diligence on the offering before they approve it for sale by the firm and its representatives. Even if a broker-dealer previously performed a reasonable investigation in connection with the offering, it must complete a new investigation into each subsequent offering.
In Notice 03-71, federal regulators noted the complex and often difficult-to-understand nature of these non-conventional investments. They expressed their concern that investors may not fully understand or appreciate the risks associated with these products.
As such, broker-dealers must do all of the following:
- Conduct appropriate due diligence regarding these products
- Perform a reasonable-basis suitability analysis
- Perform a customer-specific suitability analysis for recommended transactions
- Ensure that the promotional materials they use are fair, accurate, and balanced
- Implement appropriate internal controls
- Provide appropriate training to registered representatives who sell the products
FINRA has sent its members official notices reminding them of their legal obligations under Regulation D and other securities laws when broker-dealers recommend private placements. FINRA notes that, at a minimum, broker-dealers should conduct a reasonable investigation concerning all of the following when recommending a private placement:
- The issuer and its management
- The issuer’s business prospects
- The assets held by or to be acquired by the issuer
- The claims being made
- The intended use of the proceeds of the offering
Common Ways Brokers Misrepresent Private Placements
In some situations, brokers go beyond negligently performing their duties and instead outright misrepresent investments, usually for their own financial gain. Companies sometimes enlist brokers to pitch private placement offerings to the broker’s network of high-net-worth clients. Unfortunately, some brokers who offer investment opportunities in private placements to their clients may negligently or intentionally misrepresent material facts about the investment, including:
- Failing to disclose investment fees and brokerage commissions
- Misrepresenting the liquidity of the market for the company’s securities
- Misrepresenting the company’s valuation or its financial well-being
- Failing to disclose other investors and their deal terms
- Not disclosing details of the equity structure and the rights of each equity class
- Presenting a private placement as a suitable investment to clients with low risk tolerances, even though emerging companies that typically conduct private placements still have a high risk of failure
- Failing to provide a complete disclosure of the company’s financials
- Misrepresenting the securities offering as one that has little or no risk
- Failing to disclose conflicts of interest between the issuing company and the broker/firm, such as the investment firm already possessing an equity stake in the company
The Securities and Exchange Commission has strict disclosure requirements. When brokers sell securities or alternative investments without properly disclosing all potential risk factors, they and the brokerage firm that employs them could be found responsible for the financial losses suffered due to such fraudulent private placements.
Red Flags for Investors
Investors who receive private placement offerings should watch for private placement fraud signs that may indicate a broker has failed to disclose material facts or misrepresented information about the company making the private placement offering.
Common red flags include:
- Discrepancies between the broker’s verbal representations and the private placement memorandum
- Inability by the broker to explain complex issues
- Oral or written disclosures lack material facts, making them confusing or challenging to understand
- Brokers deflect or provide non-responsive answers to questions
- Brokers become agitated or defensive when pressed for more information
- Brokers decline to discuss the brokerage firm’s financial interest in the offering, including investment management fees or broker commissions
- Calls, emails, or text messages go unanswered or do not receive prompt responses
- Brokers use high-pressure and aggressive sales tactics, such as presenting an offering as a limited-time opportunity or claiming that other investors are quickly filling up the securities offering
- Brokers continue to follow up despite prospective investors initially declining interest in the offering
- Brokerage firms cannot describe the due diligence they have performed on the company making the offering
Financial and Legal Consequences of Misrepresentation
One of the fundamental requirements for broker-dealers recommending such offerings is ensuring that the private placement aligns with the customer’s investment objectives and is suitable. Due to the lack of regulatory oversight and uncertainty regarding new businesses, most private placements represent a level of risk that many investors are unwilling to take on. When brokers use fraudulent schemes to influence investment decisions or fail to adequately inform investors of the risks involved with these investments, they may be liable for the losses they cause.
Brokers or brokerage firms that misrepresent the material facts or risks of a private placement offering can face various financial and legal consequences for their actions. First, brokers and firms may bear liability to their investors, who can pursue compensation for losses they suffered as a result of this misrepresentation. Investors may also seek financial recovery for excessive, undisclosed brokerage commissions or investment management fees. Generally, such legal actions involve FINRA securities arbitration.
Brokers and firms may also face professional discipline for negligently or willfully failing to make disclosure or misrepresenting facts in private placement offerings, including fines or suspension of FINRA membership. Brokers may also lose their licenses to offer or transact in securities. Finally, firms and brokers can face civil actions under state and federal securities regulations for violating securities laws, which may also result in fines, temporary or permanent prohibitions on participating in securities offerings, or, in the most serious cases, criminal prosecution.
Contact Our Private Placement Fraud Attorneys for Legal Help
If your broker negligently or knowingly misled you into an unsuitable investment in a private placement offering, you may have the right to hold them accountable for the economic harm you suffered as a result. Contact Erez Law PLLC today to discuss your options during a confidential consultation with a private placement misrepresentation attorney.