The Law Offices of Howard Rosenfield Home
Private Placements
- What is a Private Placement Investment?
- Who are Private Placement investments suitable for?
- What are the risks to investing in a Private Placement?
- What is an “Accredited Investor”?
- What is the purpose of the “Accredited Investor” requirements?
A private placement is the offering to a limited number of private investors who can fend for themselves without the full protection of disclosures required for public offerings.
Typically, private placement programs are suitable only for wealthy individual investors, banks and other financial institutions, mutual funds, insurance companies, and pension funds. These types of investments are generally only suitable for accredited investors, such as those listed above, who understand the potential risks of these complex securities transactions.
The sale of securities in a private placement do not have to be registered with the U.S. Securities and Exchange Commission (SEC), nor is the company required to provide a prospectus to potential investors, which means that detailed financial and other important information may not be disclosed.
An accredited investor is a person or a business entity who can purchase securities that are not registered with financial authorities because they satisfy one or more of the exemption requirements under Regulation D which include requirements regarding income, net worth, asset size, governance status or professional experience. The Securities and Exchange Commission (SEC) defines “accredited investors” as those investors who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings. Accredited investors include natural high net worth individuals (HNWI), banks, insurance companies, brokers and trusts.
The purpose of Accredited Investor Requirements is to safeguard investors who may not be financial sophisticated enough to bear the higher risk of private placements.
FINRA and the SEC enforce these requirements in order to strike a balance between promoting investments and safeguarding the investors. Due to the fact that private placements often involve startup companies which tend to be more risky, and may be founded only on conceptual research and development activities, without any marketable product, and may have a high chance of failure. Private placement investments may have a higher probability of failure which can lead to the increased risk of investors losing the entirety of their investments.
Accredited investor requirements protect the less knowledgeable, individual investors who may not have the financial acumen to understand the risks involved nor the financial cushion to absorb the potential high losses. These standards are in place to ensure that Private Placements are available only to accredited investors who are financially sound, knowledgeable, and experienced enough to bear the risk associated with unregistered securities and investments.
For many years, Wall Street was overwhelmed and fraught with “penny stock” brokerage firms. After overwhelming abuse and tremendous losses to the investing public, the regulatory authorities stepped in and closed the violating firms. Similar abuse has resurfaced in the form of “private placement investments” touted and promoted by firms highlighting the benefits of the private placements investments to retirees, but failing to provide a fair and balanced presentation of the risks and rewards of the proposed investments. Often times, the wrong-doing doesn’t become clear until the distributions that were touted by the advisor or broker are in doubt and/or some of the companies file bankruptcy. Investors may not realize until it is too late that the investments their broker or advisor assured them would generate reliable retirement income is neither reliable nor generating any income and is worthless.
To help us evaluate your chances for a successful recovery for “Private Placements” we offer a free and confidential claim evaluation.
