Securities Attorney Assisting Investors in New York and Throughout the U.S.
There is a wide array of investments beyond stocks and bonds that few investors know well, such as private placements. Before investing in any security, it is essential for an investor to fully understand the details regarding the investment, including the benefits and risks associated with the investment, so that he or she can determine if the investment is appropriate to meet his or her financial objectives. Not fully understanding private placements, for example, can leave you vulnerable to fraud, misrepresentation, and other broker misconduct. If you invested in a private placement without proper knowledge and suffered losses as a result, you should find out more about possible strategies for seeking compensation. New York securities lawyer Irwin Weltz will advocate on behalf of investors harmed by broker misconduct. He represents investors in securities litigation and arbitration throughout the nation.
Understanding Private Placements
Federal securities laws provide that companies cannot offer or sell securities that have not been registered with the Securities Exchange Commission (SEC) unless some exception applies. Private placements are securities that do not need to be registered with the SEC, under the exceptions set forth in Regulation D of the Securities Act of 1933.
Rules 504, 505, and 506, which are set forth in Regulation D, define the requirements that must be met in issuing private placements. First, under Rule 504, certain issuers are permitted to offer and sell up to $1 million of their securities per each 12-month period to any type of investor. There is no limit on the number of investors who can purchase such securities. Under Rule 505, issuers can sell up to $5 million of their securities per each 12-month period to an unlimited number of accredited investors, but only to up to 35 non-accredited investors. Lastly, Rule 506 is similar to Rule 505 with regard to the limitations on offerings, with the exception that any non-accredited investors to whom the security is sold must be financially sophisticated.
Brokerage Firm and Broker Duties Pertaining to Private Placements
Pursuant to the findings of the federal courts, the Securities Exchange Commission, and the Financial Industry Regulatory Authority (FINRA), brokerage firms in New York and elsewhere have a duty to perform a reasonable investigation regarding the veracity of representations concerning a private placement that are made by the issuer of the private placement. To meet their due diligence requirements, firms should evaluate the issuer of the security and its business prospects, the assets that the issuer holds, how the issuer intends to use the proceeds of the offering, and any claims made by the issuer. Firms evaluating private placements should also identify any red flags that arise with the offering and address any concerns that would be pertinent to a potential investor.
Meanwhile, under the suitability requirement of FINRA Rule 2310, brokers and financial advisors must make sure that any private placement transaction that they recommend to a client is suitable to meet the client’s financial needs and goals. Investors can suffer significant losses when brokerage firms fail to conduct a reasonable investigation into a private placement offering or rely on third-party information in evaluating whether the offering raises concerns. Additionally, investors can sustain losses when brokers fail to uphold their suitability duties and suggest that an investor buy holdings in private placements that do not align with the investor’s financial needs and goals. If you lost funds due to a private placement transaction, you should consult a capable securities lawyer to discuss your options for recouping your losses.