Small or start-up companies may sell non-public securities to raise capital. These securities are known as private placements.
Private placements are not subject to SEC regulations.
Private placements can be riskier and more fraud-prone than publicly traded securities because they are not registered with the Securities and Exchange Commission (SEC). In recent years, failed and fraudulent private placement securities have caused many investors significant financial losses and resulted in regulators disciplining brokerage firms for improper sales practices.
If you lost money on a private placement investment that may have been inappropriately recommended to you or was part of an investment scam, contact a private placement attorney at the Business Trial Group and learn your legal options.
Why Private Placements are Risky
SEC-registered securities are subject to laws and regulations that are intended to protect investors. Registered securities, for example, must provide comprehensive disclosures about a company’s financial condition, operations, and other important matters.
Private placements, however, are not subject to securities laws and regulations. Investors often have limited information about the company issuing the security, its management, and its finances. This lack of transparency can make it difficult for investors to gauge a security’s performance and it may also make them more vulnerable to investment fraud.
Another potential problem with private placements is a lack of liquidity. Non-publically traded securities typically have restrictions that make them difficult (if not impossible) to sell and may negatively affect their selling price. As a result, if an investor buys a private placement and later wants to liquidate it, they may be unable to, and end up taking a loss.
Brokers Selling Private Placements Have Specific Duties
The Financial Industry Regulatory Authority (FINRA) has specific requirements for brokers who recommend or sell private placements. These requirements include:
- Filing certain documents with FINRA.
- Performing due diligence on private placements to understand their potential risks, identifying possible fraud, and ensuring that the securities are suitable for their clients.
- Making sure that a prospective private placement investor meets accredited investor standards (in general, private placements can be sold only to investors who meet accredited investor financial criteria).
In addition to these requirements, brokers must not make any misleading statements about private placements (i.e. promising high returns and low risk), provide misleading sales materials, or omit information the investor needs to make an informed investment decision.
Brokers must truthfully represent private placements.
FINRA has sanctioned brokerage firms and individual brokers for violations related to selling troubled private placements. Aside from FINRA discipline, investors in some cases may be able to file a claim for private placement investment losses.
Legal Help for Private Placement Investment Losses
Investors who lost money on private placements may be able to recover their losses if the investment was part of a scam, or if their broker committed misconduct during the sales process, such as making an unsuitable recommendation or misrepresenting the private placement.
Learn your legal rights and options: contact the Business Trial Group’s private placement investment attorneys for a no-cost, no-obligation case review.