JOBS Act

Private Placements are considered alternative investments and are issued under Regulation D under the Securities Act of 1933. Regulation D contains rules for issuing securities that provide exemptions from the more rigorous Securities and Exchange Commission (SEC) registration requirements and allows companies to issue securities without normal disclosures.

Investors who are recommended private placements must meet the “accredited investor” standard under Rule 501. Rule 501 defines “accredited investor” as any person who has a net worth in excess of $1,000,000, excluding residence, or annual income in excess of $200,000, $300,000 if filing jointly with a spouse, in the two most recent years.

According to a 2008 estimate, companies issued approximately $609 billion of securities through Regulation D offerings. While the private placement market allows many small companies to raise capital, regulators have raised a number of issues with due diligence procedures and brokerage firm sales efforts when selling private placements to investors. The North American Securities Administrators Association says private placements are one of the most common cause of regulatory action by state regulators. States brought more than 200 enforcement actions involving private placements in 2011, more than doubled the number of action in2007.

Every year, companies across the United States raise hundreds of billions of dollars selling securities in non-public offerings that are exempt from registration under the federal securities laws. These offerings, known as private placements, can be a tremendous source of capital for both small and large business. However, according to FINRA, investors should be aware that private placements can be illiquid and are very risky with the potential to lose most or all of your investment.

Fraud and Sales Practices Abuses

For over three years, FINRA has been investigating private placements and has uncovered fraud and sales practice abuses related to private placements that resulted in sanctions of individual brokers and financial institutions for providing investors inaccurate information relating to private placements. In addition, some materials omitted information necessary for investors to make informed investment decisions. Finally some firms failed to conduct adequate investigations into whether the private placements were suitable for customers.

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