Private Placements – what are they?

Private placements can be stocks, limited partnership interests, or other securities issued by companies that are not publicly traded. Private placements can be investments in things like a single apartment complex, a single oil well, a basket of properties or oil wells, or a biotech company.

The companies issuing these securities do not have to comply with many federal securities laws such as publicly filing their quarterly and annual financial statements. They are not required to provide ongoing disclosures to investors like public companies are. You cannot sell these securities on exchanges like the NASDAQ or NYSE when you need money.

The public listing of securities provides protections for investors. The most important protection for investors is the obligation of a publicly traded company to make public filings. Investors in private placements do not have those protections.

The risks of investing in private placements are often significant, but not adequately disclosed to potential investors. Moreover, the cost of selling these securities can be prohibitively high. You cannot count on being able to sell these securities when you need money.

Most private placements are restricted to sophisticated investors, such as hedge funds, insurers, and wealthy individuals seeking alternatives to public stocks and bonds. But, many are recommended to “accredited investors” by retail brokerage firms. An accredited investor is simply an investor whose income and net worth is above a certain level. There are many people who are accredited investors who are not wealthy and cannot afford to lose all or even some of their investment in a private placement.

Just because you qualify as an “accredited investor” to invest in a private placement does not mean that it is a good investment for you. The “accredited investor” category is a threshold for investing — it does not mean that the investment is suitable for you.

Why do brokers recommend private placements?

As the Wall Street Journal reports, sales of private placements are surging. With all of these risks and disadvantages, why is this happening?

Private placements are attractive to brokers because they pay higher commissions than other investments. This causes brokers to recommend these investments to customers — even when those customers are older and have limited savings. Often brokerage firms will tout certain private placements to their financial advisors who will then recommend them to their customers.

Who are the brokers recommending private placements?

Not all brokerage firms sell private placements. The Wall Street Journal analyzed those firms that do sell private placements. It found that firms that sell private placements also tend to hire financial advisors with a checkered past. Many of the financial advisors working for these brokerage firms have been sanctioned or been involved in disputes with their customers because of aggressive sales tactics.

According to the WSJ’s analysis, firms selling private placements were 14 times more likely to have been expelled from the industry by FINRA than those that did not sell private placements.

According to the data, firms that sell private placements are significantly more likely to be engaged in wrongdoing than firms that do not sell private placements.

You should beware of anyone recommending  that you invest in a private placement.

If your financial advisor recommends a private placement to you, check them out on FINRA’s BrokerCheck AND check out other financial advisors from your brokerage firm. 

This could reveal that you are working with one of the unscrupulous brokerage firms that hawk private placements and other high commission investments to their customers.

https://www.wsj.com/articles/firms-with-troubled-brokers-are-often-behind-sales-of-private-stakes-1529838000

How the Wall Street Journal did this analysis: https://www.wsj.com/articles/how-the-journal-did-the-math-1529841600?mod=article_inline

tiger logoLisa Bragança recovers losses for investors all over the country, protects whistleblowers, and defends individuals and businesses in government investigations. As a Branch Chief with the SEC Division of Enforcement, Lisa investigated a wide range of investment fraud and Wall Street misconduct.

You can reach Lisa at (847) 906-3460 or Info@SECDefenseAttorney.com. www.SECDefenseAttorney.com

Disclaimer: This information is for general purposes only and should not be interpreted to indicate a certain result will occur in your specific legal situation. The information on this website is not legal advice and does not create an attorney-client relationship.