Not every investment is suitable for every investor, and your stockbroker
or financial advisor is held by certain rules that help ensure your money
goes into investments that are right for you. Despite this, as FINRA lawyers,
we can tell you that many investors are excited about high returns and
promised low risk when it comes to private placements. A broker or financial
advisor may make a private placement look inviting, but fail to explain
how it works and the risks involved.
Brokers and financial advisors may push these risky or outright fraudulent
private placements on the unsuspecting. Unfortunately, it’s the
investors who end up suffering. Of course, not all private placement offerings
constitute fraud, but you should be aware that even the most well-known
are inherently risky and should be considered carefully before handing
over your cash.
What Is a Private Placement?
A private placement is a non-public offering used to raise capital. An
offering that is not a public offering is exempted under Regulation D
of the Securities Act from SEC registration. These investments are often
sold to "accredited investors" by various broker-dealers. Private
placement investments are generally illiquid, meaning they cannot be readily
sold and are not traded on the open market. Private placements are typically
promissory notes or shares of common stock.
Private placements have come under intense scrutiny following highly publicized
failure at Medical Capital, Provident Asset Management, and Striker Petroleum.
Other private placement investments include IMH Secured Loan Fund and DBSI.
Broker-dealers who sold these private placements include:
- Securities America
- Capital Financial Services
- National Securities
- Independent Financial Group
These broker-dealers sold millions in toxic private placements earning
large commissions along the way. The private placements were often sold
to clients as low-risk, safe investments suitable for retirees and as
part of the fixed-income component of a client's portfolio. In reality,
these investments were not low-risk as represented; in fact, these were
one of the highest risk investments possible. Broker-dealers often also
failed to perform even the most basic due diligence into the companies
whose securities they were selling.
What Are Potential Problems with Private Placements?
- They may lack transparency and liquidity.
- The investments can be hard to understand.
- Regulatory oversight may be slim for private placements.
- There's a risk of investment fraud.
What Can I Do if I've Lost Money on an Unsuitable Private Placement?
Private placements are complicated investment tools involving sales of
unregistered securities, which operate outside of the stock market. Small
businesses often issue these securities as a method of raising capital.
Due to the complex nature of the investments, they are generally marketed to
mutual funds, pension funds, institutions such as large banks and insurance companies,
and sophisticated individual investors.
If you were taken in by private placement investment fraud, or if you feel
your advisor or stockbroker recommended unsuitable private placements
to you, it is in your best interest to talk to an experienced investment
fraud attorney. Meyer Wilson see these types of claims often, and we offer
a completely free, no-pressure consultation so that you can learn about
your rights to recovery after securities fraud, stockbroker misconduct,
or investment fraud.
Contact us today if you would like to get started with a free consult!