SEC Staff Warns Investors on Risks of Purchasing Securities in Private Placements

The SEC Office of Investor Education and Advocacy cautioned investors of the risks involved in purchasing securities sold in private placements. (See Regulation D ("Rules Governing the Limited Offer and Sale of Securities Without Registration Under the Securities Act of 1933".)

In an Investor Bulletin, SEC staff warned that criminal actors may use unregistered offerings as a means to commit fraud and scams. SEC staff said that it may be difficult or impossible to recover any investments that are stolen as a result of these illicit activities. They urged investors to consider prominent risks involving private placements prior to investing, including the risk of (i) potential for a total loss, (ii) low levels of liquidity and potentially little to no secondary market, and (iii) limited information and disclosure availability.

Additionally, SEC staff encouraged investors to conduct thorough due diligence on private placement offerings, as these offerings are not subject to the same laws designed to protect investors in public offerings. SEC staff set forth factors to research when considering private placement offerings, including (i) the financial viability of the issuer, including presenting financial statements, (ii) experience and background of the issuer and its employees, (iii) identifying any competitors in the area and (iv) any instances of broker misconduct that may be relevant to the offering.

SEC staff emphasized that investors that choose to purchase private placement offerings should be comfortable holding the investment indefinitely and should understand that it may be difficult or impossible to sell the asset.