FINRA Investor Alert: Evaluate Private Placement Risks before Placing Them in Your Portfolio

FINRA issued an Investor Alert titled "Private Placement - Evaluate the Risks before Placing Them in Your Portfolio" to caution investors that placing money in private placement portfolios can be a risky investment that has the potential to tie up money for a long time. In the alert, FINRA explains that a private placement is an offering of a company's securities that are not registered with the SEC, and are not offered to the public at large. Private placements are offered pursuant to Securities Act Regulation D ("Rules Governing the Limited Offer and Sale of Securities without Registration under the Securities Act of 1933"), and one must be an "accredited investor" in order to invest in a private placement security.The alert further states that, since private placement offerings do not have to be registered with the SEC, companies are not required to file financial reports. Investors could experience problems in attempting to find out how the companies and, therefore, their investments are doing. FINRA recommends that investors should carefully assess how private placements fit with their long-term investment plans and other investments they hold before buying private placement securities. Additionally, the alert provides a series of tips to help accredited investors determine if private placement securities are the right investment decision, including:

• find out as much as you can about the company's business and understand how and when you might liquidate your private placement securities;
• ask your broker what information he or she was able to review about the issuing company and this private placement;
• be wary if you receive paperwork to sign about a private placement without having a personalized discussion with your broker about why such an investment is right for you; and
• be wary of private placements you hear about through spam emails or cold-calls, since they are often fraudulent.

See: FINRA Investor Alert "Private Placements - Evaluate Risks before Placing Them in Your Portfolio"; FINRA Press Release.See also: FINRA Notice 13-26: New Private Placements Form Pursuant to FINRA Rules 5122 and 5123 and FAQ (August 30, 2013); FINRA Proposed Rule Change to Rule 5123 (Private Placements of Securities) (June 21, 2013).