Each month and again on a quarterly basis, the agency that regulates the financial industry, FINRA (Financial Industry Regulatory Authority), produces a detailed report that runs down all disciplinary actions recently taken against brokerage firms and brokers.
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.
What Is a Private Placement?
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 You’re An Accredited Investor…
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.
Private Placements Afflict Many Retail Investors
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.
We've all seen them. Ads and billboards where business claims it's the "world's best" whatever--for some reason we instantly think of pizza or burgers. Generally we take these outlandish claims with a grain or salt (or a shake of oregano). But in the world of private placement offerings, false advertising is no joke. Especially not to FINRA. As usual, the regulatory agency is out to punish private companies who sell or attempt to sell the public any type of securities under false pretenses or based on misinformation.
A recent article on Yahoo finance reminded us to talk about what an important role advertising has to play in the securities industry, and how often advertising is used to manipulate unsophisticated investors into shady deals. For example, from the article:
Now, this is a particularly large and egregious case. But deceitful deals like this are being pitched to unsuspecting investors all the time. As we've mentioned many times before, if you're not an investment professional yourself, before you consider getting involved in a private placement or REIT like the one described above--or frankly any kind of investment offering--consult a trusted financial adviser and get their opinion first. Otherwise you could become another alarming statistic. After all, in 2012 alone, FINRA reported $10.4 million in fines from cases involving alleged advertising violations. And that's not even accounting for the tens of millions of dollars in restitutions FINRA ordered.
If, unfortunately, it's too late, and you've already been the victim of misleading advertising for securities, please contact us immediately to discuss your options.
We don't know about you, but seeing the unjust finally get their due always gives us a boost. hat's in part why we look forward to the release of FINRA's monthly "Disciplinary and Other FINRA Actions" report. This is just what it sounds like, a listing of all the sanctions, fines, suspensions, and other disciplinary actions that have handed down by FINRA against the iniquitous brokers, investment advisors, and brokerage firms who have dis-served or manipulated their customers in so many different ways. It's a long report, but what stood out to us is the recurring appearance of firms who have mishandled private placements in flagrant disregard for FINRA's warnings over the past few years that they would be cracking down on private placements (see 2010 and 2011 "Annual Regulatory and Examination Priorities Letters" as well as Regulatory Notice NTM 10-22 in April 2010.) FINRA was not kidding. Janco Partners, Lincoln Financial, Roth Capital Partners, and the Tidal Group--to name a few--have all suffered penalties as a result of failures to fulfill their obligations related to private placements. If you're not sure or need a refresher on what a private placement is, here's Wikipedia on the subject:
Also worth noting in the report is the fact that KMS Financial Services was punished for failing to do its due diligence before letting its broker-dealers sell shares in a dubious hedge fund. Bad on them. FINRA warned you! According to Regulatory Notice 10-22, if a firm knows about a private placement offering, they are required to conduct due diligence to make sure the private placement is suitable for its customers before investing.
Finally, FINRA also provides listings for individual brokers who have been suspended. It's a long list (see page 17). If you've ever had it in the back of your mind that your broker-dealer ripped you off, why not see if he or she made the list... And then contact us.