Private Placement Investments in the Hot Seat

Reuters recently reported on private securities, explaining that the Financial Industry Regulatory Authority (FINRA) has taken multiple disciplinary measures this month against improper sales of private placements. Brokers working for independent brokerage firms typically sell these securities privately to select investors. One reason these brokerage firms are so attracted to the sale of private placements is that they can earn high commissions, between 10 to 20 percent of each sale. These private securities are not publicly traded or registered with regulators.

FINRA's disciplinary database shows at least eight cases in August, and more cases could be surfacing soon. Disciplinary actions have included everything from brokers being thrown out of business to firms being reprimanded for inadequate supervision.

If brokers and firms comply with industry rules, the sale of these private, illiquid securities are often not illegal but they may be inappropriate for most investors and often result in serious investor losses. FINRA's enforcement head referred to private securities as "a ripe area where there's a potential for a lot of harm."

Due to recent industry chances, FINRA now requires brokerages to provide documentation of private offerings within 15 days of sale. With faster filings, FINRA is hopeful that it will be able to catch more wrongdoing before investors lose more money.

Some of these private offerings are then referred to FINRA's enforcement unit for additional review. Regulators look for potential red flags such as:

  • Offerings in high-hype fields (ex: natural gas and extraction)
  • A surge in business
  • Brokerages set up for the sole purpose of pushing a company's private offering

Selling Unregistered Securities Under a Safe Harbor

Financial industry rules known as "Regulation D" allow for the sale of unregistered securities under a safe harbor. Just last month, the U.S. Securities and Exchange Commission lifted the private securities advertising ban, but the sale of these private securities is still subject to certain conditions, such as selling only to accredited investors who make at least $200,000 a year or have a net worth of $1 million or more. Another industry rule change poised to take effect in September will prevent felons and others kicked out of the securities industry from selling private placements.

If you or someone you know lost money because of a private securities or another type of alternative investments, please contact our firm for a complimentary evaluation of your case.


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