Private Placements

As a general rule, every offer of securities to the public in the United States must be registered with the SEC pursuant to the Securities Act of 1933 (the ’33 Act). However, certain categories of securities are exempt from these requirements, including government securities such as treasuries or municipal bonds. In addition, the SEC exempts “private placement” investments from registration requirements under Regulation D of the ’33 Act (Reg D).

Reg D, established in 1982, simplified the rules for securities offerings. This development has helped smaller businesses raise capital as initial public offerings are costly and time-consuming and many companies would prefer to raise money in private markets. In the years following the Great Recession, private placements have grown in popularity among investors, due in part to the prevailing low interest rate environment and increased solicitations by financial advisors. A widely published 2018 study showed that, in 2017 alone, the sale of private placements by various stockbrokers totaled at least $710 billion, representing a nearly 300% increase from 2009. Additionally, in 2020, the SEC issued final rules harmonizing and improving its exempt offering framework, while also amending the categories of individuals and entities that may qualify as accredited investors.

Despite the increased popularity of private placements, investors should proceed with caution. An investor in a private placement will receive restricted securities, meaning that the investment will be illiquid and difficult to resell. Moreover, these restricted securities—which may come in the form of shares, preferred stock, or various debt instruments including bonds or promissory notes—typically offer limited information about the issuer and management, as well as limited financial reporting. Investors may receive some information concerning the issuer and its financial condition in what is known as a Private Placement Memorandum (PPM) or similar term sheet. But the disclosures in a PPM can vary depending on the exemption from SEC registration used, the types of investors targeted, and the offering’s complexity.

While some broker-dealers may be incentivized to recommend private placements due to what is typically a hefty commission structure, brokerage firms and their stockbrokers have a duty to conduct adequate due diligence on private placement investments. In fact, FINRA has provided ample guidance on how a broker-dealer should conduct due diligence on a private placement investment, including visiting the issuer’s facilities, inspecting the issuer’s assets, examining third party reports (such as geological reports for an oil and gas private placement), and obtaining expert reports when appropriate.

The attorneys at Giarrusso Law Group LLC have significant experience in successfully representing investors who have incurred losses in private placement offerings, including offerings related to real estate and oil and gas drilling funds. Investors may pursue a claim to recover monies through securities arbitration before FINRA, or in some instances, through litigation. Investors who wish to discuss a possible claim are invited to contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, confidential consultation.