finra investor alert

FINRA Investor Alert: Beware Private Placements

Yesterday, the US securities industry watchdog, the Financial Industry Regulatory Authority (FINRA), issued its latest investor alert. The alert addressed new issues related to investing in private placement deals. If you’re not familiar with FINRA and its investor alerts, you should know that the agency is responsible not just for regulating the securities industry, but also for identifying problems surrounding new financial products and trends in broker misconduct and investment fraud. The fact that private placement deals have earned their place on FINRA’s watchlist can be taken as a clear indication that these deals should be approached with caution and that they are almost certainly not appropriate for the casual and/or unsophisticated investor. In other words, buyer beware.

Creative Commons

Creative Commons

A private placement is a limited offering of a company’s securities that is not SEC-registered and not public. Most importantly, perhaps, as stipulated by Regulation D of the Securities Act of 1933, private placements are only suitable for “accredited investors.” Put simply, accredited investors are high net-worth individuals with assets of $1 million or more (not counting primary residence), with strong verifiable incomes over the past two years. If you do not meet these requirements, you should absolutely not be invested in a private placement, nor should your broker invest your money into one. Such investments would be deemed unsuitable according to FINRA rules and regulations.

If, on the other hand, you do qualify as an accredited investor and you are interested in purchasing securities as part of a private placement deal, proceed with all due caution. As FINRA warns, companies that issue private placements are not required to file the same financial reports as publicly-traded companies, and these securities often include risks and liquidity considerations that more simple and transparent securities do not. When considering a private placement, investors and brokers should carefully read all documents supplied by the issuing company, including especially the offering memorandum or prospectus. Then, make sure that the risk and liquidity issues associated with this securities fit well into your overall investment portfolio.

We greatly appreciate FINRA's calling attention to the pitfalls of private placement deals, since over the years we’ve seen far too many cases of novice investors purchasing these securities when they were not accredited investors and/or when they did not understand the product itself. And of course, they lost a lot of hard-earned money doing so.

As always, if you or anyone you know has been the victim of broker misconduct or investment fraud related to private placements or any other financial security, please contact us for a free consultation.

 

 

Alt Mutual Funds Not Like Traditional Ones

If you've been keeping up with the activities of financial industry watchdog FINRA (Financial Industry Regulatory Agency) like we have, you've probably noticed an important trend: FINRA has issued a number of warnings recently about complex financial products that have made their way into investor portfolios, sometimes without investors realizing just how complex and--more to the point--how risky they actually are.

The latest warning concerned so-called "Alternative Mutual Funds," which contain more exotic strategies and asset mixes than their traditional counterparts, including hedging and leveraging through derivatives and short-selling. According to a recent Reuters article, these Alt Funds, which can resemble hedge funds but remain subject to the regulation by the Investment Company Act of 1940, have become increasingly popular in recent years as investors seek greater yields while trying to avoid getting burned like they did in 2008. Whatever their motivation, investors need to be exercise all due caution when considering purchasing Alt Funds because these funds may conceal risks that the unsophisticated and sophisticated investors alike may not be fully aware of. 

If you or your investment advisor are thinking about buying into an Alternative Mutual Fund, FINRA's Investor Alert on the subject strongly suggests taking a close look at the following points: Investment  Structure,  Strategy Risks, Investment Objectives, Operating Expenses, Fund Manager, and Performance History. Investigating these points will provide you with greater insight into a financial product whose complexity will almost certainly raise suitability issues in the near future. Indeed, if past experience is any indication, FINRA's Investor Alert portends greater scrutiny of not only this product but of brokers and investment advisors who see fit to recommend Alt Funds to clients.