Private placements, as the name implies, are privately sold investments most commonly offered by small businesses and start up companies. Private placements are not required to register with the Securities and Exchange Commission (SEC) so long as they comply with industry rules. Since private placements are not publicly traded and lack regulatory oversight they carry considerably high risks than stocks and other securities products sold on the New York Stock Exchange.
According to a recent article in Reuters, “eight cases involving private placements have surfaced in the disciplinary database run by FINRA, the industry-funded Wall Street watchdog.” Many cases involve violations of suitability requirements in connection with the sale of private placements. Broker-dealers often earn a relatively high commission on the sale of private placements. These high commissions are often enough for some broker dealers to overlook suitability requirements. Brokers typically earn commissions of 5% to 10% of the sale, and as much as 15% to 20%.
The high yields offered by private placements often attract many investors, especially retired individuals looking for a source of income. However, do to the risks private placements are arguable unsuitable for most investors. Private placements are incredible complex and often illiquid investment that are intended for sophisticated and institutional investors.It is not uncommon for some brokers to downplay the inherent risk and portray private placements as “safe.” Although brokers are essentially just sales man, they do have a duty to perform adequate due diligence to ensure that the investments they recommend have a reasonable likelihood of success.
Furthermore, Broker are required by FINRA to sell private placements only to accredited investors that meet suitability standards. The investors’ age, risk tolerance, net worth, and investment experience should be taken in to account in order to determine whether a particular investment recommendation is suitable. Broke that overlook FINRA suitability requirements or mislead investors regarding risks can be liable for investment losses through FINRA arbitration.
To address these concerns, recent changes to FINRA rule 5122 and FINRA Rule 5123 require private placement to file offering documents such as the private placement’s memorandum or term sheet, within 15 days of the first sale. The rule change will help regulators identify dubious investment offerings.
If you suffered significant losses and want to learn more about your legal options against the broker-dealer that sold you a private placement, please contact the securities attorney of The White Law Group at 312-238-9650 for a free consultation.
The White Law Group, LLC is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Boca Raton, Florida.
For more information on The White Law Group, visit http://www.whitesecuritieslaw.com.