Category Archives: FINRA News & Alerts

Rely upon Blau & Malmfeldt, a securities law firm in Chicago, for the latest Financial Industry Regulatory Authority (FINRA) news and alerts.

FINRA Issues Alert to Investors About Private Placements

The Financial Industry Regulatory Authority (FINRA) recently cautioned investors about the risks associated with private placement securities.  Private placement securities are those that do not need to be registered with the Securities and Exchange Commission (SEC) because they conform to a registration exemption under the Securities Act of 1933, most commonly the exemption set forth in Regulation D.  Private placement offerings marketed by securities broker-dealer firms to retail customers have come under a great deal of scrutiny in recent years.

Generally, private placements can only be sold to accredited investors, those who have a net worth over $1M or annual income over $200,000.  However, a recent change in securities laws may allow for these securities to be sold to non-accredited investors through crowdfunding and other means.

FINRA has found that the private placement memorandums and other marketing materials used in connection with the sale of private placements are often inaccurate and misleading.  These offering document typically include clauses that remove any obligation for the company to buy the securities when the investor wants to sell them.  As there are typically no markets for private placement securities, these investments are typically illiquid.  Brokers often market private placement securities as income generating investments to retirees, but because of the risks associated with these securities and their illiquidity, they are often unsuitable for retirees of relatively modest means who rely upon their investments to generate income.

FINRA suggests that investors do six things before  making any investment in private placements:

  1. Ask yourself when you would need to liquidate the asset.  If you need to liquidate the investment before the terms of the security, do not buy the security.
  2. Examine the risks.  What industry is the company in?  Who are its competitors?  What are the chances the company doesn’t make a profit?  You should try to know as much as you can about the company before you make an investment.
  3. Ask your broker about the company’s risks.  If your broker doesn’t know a lot about the company, it’s a red flag that the investment isn’t suitable for your circumstances.
  4. Ask for the PPM and all marketing documents.  These documents should be consistent.  If you notice any discrepancies in the company’s accounting or any exaggerated financial claims, you should be cautious.
  5. Check for contingency clauses.  The company should only be able to access the investment money after investors commit a certain amount of capital.  If the company can access investment money right away, it’s a sign they’re using investment money to pay everyday expenses.
  6. Don’t trust cold calls or emails!  Almost all investments solicited through cold calls and emails are fraudulent.

If you believe that your broker misled you about the risks associated with private placement securities, or recommended that you concentrate your savings in risky private securities, please call Blau & Malmfeldt at 312-443-1600 or email Paul Malmfeldt at pmalmfeldt@blau-malmfeldt.com.  Blau & Malmfeldt is a law firm that represents investors across the United States in securities, commodity futures, partnership, and shareholder rights disputes.