The Financial Industry Regulatory Authority (FINRA) issued a new investor alert leading up to the lifting of the general-solicitation ban on private-placement investments. FINRA cautions that investing in private placements, or an offering of a company's securities that is not registered with the Securities and Exchange Commission (SEC), is "risky and can tie up your money for a long time." The general-solicitation ban for private placements, eliminated by a statute in the Jumpstart Our Business Startups Act (JOBS Act), was what kept unregistered equity offerings out of reach of inexperienced investors, with only "accredited investors" allowed to invest unless a company was granted an exemption. Though the average investor will be more easily accessible to companies offering private placements, broker-dealers are still bound by SEC rules concerning investment suitability and due diligence before recommending private-placement investments. However, experienced as well as accredited investors should still remain on guard.
A private placement is a company's securities offering that is not registered with SEC and is not offered to the general public. To invest in a private placement, you generally must be an "accredited investor," which means that you must have a net worth (excluding your primary residence) of over $1 million - either alone or with a spouse - or have income exceeding $200,000 over each of the last two years - $300,000 with a spouse - along with a reasonable expectation that you will earn the same amount during the current year. Many private placements are offered pursuant to Regulation D of the Securities Act of 1933, which specifies the amount of money that can be raised and the type of investor that can be solicited to participate in the offering. The offering document, or a private placement memorandum or term sheet, will likely contain limited information on the company's business. However, since many private placement securities are issued by companies that are not required to file financial reports, investors may have problems gauging how the private placement is performing or is likely to perform over time.
Prior to investing, FINRA recommends that investors get a second opinion on a private placement investment from a licensed broker, perform independent research on the offering company, and consider personal liquidity needs. Investors also should learn whether the private placement has any attached conditions or contingencies, which affect how the issuer spends the money it raises. Information on the companies will be made available in their offering document and Form D, which is filed with the SEC, and possibly also from state securities regulators.
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. Please see our Instablog profile (left column) for ways to contact us and get answers to any of your questions about this blog post and/or any related matter.