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Regulation and Compliance > Federal Regulation > FINRA

FINRA Warns Investors About ‘Risky’ Private Placements

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The Financial Industry Regulatory Authority warned investors Tuesday that investing in private placements is “risky and can tie up their money for a long time.”

The alert comes two months after the Securities and Exchange Commission lifted a ban on advertising such offerings, as required by the JOBS Act.

In an investor alert called Private Placements—Evaluate the Risks before Placing Them in Your Portfolio, FINRA explains that a private placement is an offering of a company’s securities that is not registered with the SEC and is not offered to the public at large.

Many private placements are offered pursuant to Regulation D of the Securities Act of 1933, and, in general, you must be an accredited investor to invest in a private placement. The rules on how private placements can be advertised were recently loosened under the JOBS Act.

Gerri Walsh, FINRA’s senior vice president for investor education, said in announcing the alert that “investors should understand that many private placement securities are issued by companies that are not required to file financial reports, and investors may have problems finding out how the company is doing.” Given the risks and liquidity issues, he said, “investors should carefully assess how private placements fit in with other investments they hold before investing.”

FINRA tells investors that if they are provided with a private placement memorandum or other offering document, they should carefully review it and make sure that statements by their broker are consistent with it.

The alert offers the following tips to help investors determine if a private placement is right for them.

  • Find out as much as you can about the company’s business and understand how and when you might liquidate your private placement securities.
  • Ask your broker what information he or she was able to review about the issuing company and this private placement.
  • Be extremely wary if you receive paperwork to sign about a private placement without having a personalized discussion with your broker about why such an investment is right for you.
  • Be extremely wary of private placements you hear about through spam emails or cold calling. They are very often fraudulent.

Check out GAO Suggests Requiring RIA Advice for Accredited Investors on ThinkAdvisor.


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