Private Placement Securities


Effective Legal Counsel for Clients Nationwide

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, so that they can determine if the investment is appropriate for their financial objectives.
Failing to fully understand private placements 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, then you should consult with our attorneys at Weltz Law to find out more about possible strategies for seeking compensation. Our seasoned securities attorneys proudly advocate on behalf of investors who have been harmed by broker misconduct.

We represent investors in securities litigation and arbitration throughout the nation, and we are available to discuss your situation today. Call (877) 905-7671 for a free consultation.

What Are 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. A private placement is a type of security that is sold without an Initial Public Offering (IPO). These investments do not involve formal registration procedures as per Regulation D of the Securities Act of 1933. The rationale is that the typical private placement is only sold to sophisticated investors or a few select.

Understanding SEC Rules 504, 505, and 506 of Regulation D

According to SEC Rule 506 of Regulation D, companies that want to raise funds without going through a formal public offering can do so by selling their securities to accredited investors. Companies, however, cannot use solicitation or general advertising methods. While these companies can sell securities to up to 35 non-accredited and sophisticated investors, these individuals must have enough experience and knowledge in both financial and business matters. They must also be able to evaluate the risks and merits of the prospective investment.

Many companies enjoy the advantage of Regulation D because it allows them to raise money without a lot of red-tape. In addition, stockbrokers get paid higher commissions should they successfully get someone to invest in these offerings.
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 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 is 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 theirsuitability 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 with Weltz Law to discuss your options for recouping your losses.

Lack of Due Diligence & Private Placement Securities Fraud

In addition to reading the issuing company’s Form D, it is important to request more information from your broker. For example, economic risks surrounding the company’s business, competitors in the industry, and more. They must be able to review all aspects of the issuing company and the private placement. Stockbrokers have an obligation to make investment recommendations that are suitable to your risk tolerance and financial goals. The broker must be able to explain why the private placement is right for you before making you sign any paperwork.

Because private placements are considered high-risk investments, investors can face substantial losses if there is a lack of due diligence by entities who made the recommendations. If you suffered financial harm due to private placement securities fraud, it is important to contact our trusted attorney at Weltz Law so we can get to work fighting for your best interests.