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Broker-dealers oftentimes use broker-dealer self-offerings (BDOs) to raise capital by selling their own or an affiliate's securities. Typically BDO offerings come in the form of registered public offerings or private placements. Even though BDOs can be a legitimate investment, potential for abuses still exist. Prior actions have been brought against broker-dealers and financial advisors that have sold more than $36 million in BDOs to clients that involved fraud or other serious misconduct - numerous cases involved high pressure sale tactics targeting elderly or retired investors. Thus, investors are encouraged to consider the risks associated with investing in BDOs and the possibility of fraud or other misconduct before buying their broker.

When an investor purchases a private BDO, they are investing in the brokerage firm itself. Money raised in a BDO offering is usually used to finance a brokerage firm's operations. Therefore, the investor shares the risks that business will be unprofitable in the near future. The Securities and Exchange Commission (SEC) places limitations on the way private BDOs can be sold to investors. For example, brokerage firms are not permitted to advertise the BDO, and the number of small investors to whom the securities can be offered is limited in number. The BDO securities sold are not registered with the SEC or filed with FINRA, and they are not publicly traded. Consequently, private BDOs are subject to fewer disclosure requirements and regulations than registered public offerings. Private BDOs are also highly illiquid investments.

Investing in a private BDO can involve significant risks, especially when a private BDO has been announced through emails or cold calling, which may be a clear sign of a fraudulent offering. Investors can avoid the risks associated with investing in BDOs by considering a few very important points. First, the offering may be illegal if the brokerage firm did not register the BDO with the SEC, which means it was not subject to a Regulation D exemption. To meet the Regulation D exemption, the BDO cannot be advertised to the general public. Second, the reason that a brokerage firm is conducting a private BDO is because the firm is not a public company. So, there is no guarantee when, or even if, there will be a public market for the securities. Even if a company goes public through an initial public offering (NYSEARCA:IPO), federal and state laws often require that unregistered or private securities acquired in transactions such as BDOs be held for a year or more before they can be sold. Last, when an investor buys a private BDO, the brokerage firms is getting all the investor's money rather than just a commission. The brokerage firm might be selling the BDO to benefit from the offering in a certain way - the firm has been losing money or it needs cash reserves to meet regulatory requirements.

Investors should also consider the following red-flags:

-Cold-Calling or Spam: Brokers selling problematic private BDOs often use unsolicited telephone calls or email to sell private BDOs.

-High Pressure Sales Tactics: Dishonest brokers often use boiler room sales tactics, hounding investors to invest in BDOs/

-Initial Public Offering is Imminent: Investors should be wary of brokers who tell you that in the near future the brokerage firm will conduct an IPO, which will reap large profits once the securities are traded on the open market.

-Promises of Unusually High Returns: Brokers make optimistic price projections about future performance with no research to back up their assertions.

-Risk-free Investments: Some private BDO frauds involve promises that you cannot lose money.

Refusal to Provide Current Financial Documents on Request: Brokers should supply financial and other supporting materials upon a client's request.

Brokerage firms that use the above mentioned tactics oftentimes provide little or no supervision of their salespersons. Such firms may materially misrepresent experience and financial soundness of the company to attract investors. Firms will also go as far as omitting information about disciplinary actions against the firm or individuals associated with the firm.

Have you suffered losses in a broker-dealer self-offering? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website,, post a comment, call (800) 732-2889, or email Mr. Pearce at for answers to any of your questions about this blog post and/or any related matter.