Private placements are a specialized kind of securities offering generally open only to accredited investors—for the most part, high net-worth individuals and licensed brokers. Given the investors’ sophisticated understanding of securities transactions, private placements are not subject to the same rigorous disclosure requirements as public offerings. Because of this lower disclosure requirement, it’s sometimes easier with private placements for bad actors to commit fraud.
If you’re working on a private placement, here are some of the red flags to watch out for:
- The offering company fails to provide even basic information.
Companies offering a private placement aren’t required to disclose a great deal of information, but most will create a Private Placement Memorandum (PPM) outlining their financial situation in broad strokes. The absence of a PPM could be a sign the offering company has something to hide.
- The offering company downplays the level of risk involved.
Private placements come with a certain level of risk. Offering companies should be transparent with potential investors about their vulnerabilities as well as their strengths and let them make their own decisions based on their risk tolerance. Trying to make a private placement seem like a sure thing might be a sign the risk is actually higher than most investors would be comfortable with.
- Investors aren’t given an opportunity to ask questions.
Any company offering a private placement should give investors a chance to gather information that can help them make sure the investment is right for them. If a company isn’t willing to entertain questions, that’s probably become some of the answers won’t show them in a good light.
- The offering has no income or net worth requirements, or doesn’t check investors’ net worth or income.
Private placements can only offer securities to accredited investors who meet certain minimums for their income or net worth. Private placements offering securities to investors who don’t meet these requirements might be trying to take advantage of unqualified investors. You should be wary if you’re encouraged to make a private placement available to investors who aren’t able to evaluate it sufficiently.
- The offering is broadly advertised.
Private placements should not be advertised to the public because they’re not appropriate for all investors. An advertising campaign for a private placement can be an indication of potential fraud, as it could signal that the company is trying to attract investments from people who aren’t able to really evaluate the company and decide whether the investment is right for them. And even if there isn’t an intention to commit fraud, advertising a private placement isn’t in line with SEC regulations.
When so much is at stake, any offering that raises one or more red flags is cause for concern. If you think a private placement might involve fraud, contact us to discuss it. Silver Law Group and the Law Firm of David Chase have created a strategic alliance to represent SEC whistleblowers who are aware of problems with a private placement or another violation of SEC regulations.
Our team includes experienced SEC-proficient attorneys and an SEC enforcement lawyer. We have years of experience representing SEC whistleblowers, and an in-depth understanding of how the SEC Whistleblower Program operates. We’re here to assist whistleblowers as they navigate the reporting process, gather evidence, and present their findings to the SEC in a way that triggers an investigation—and, potentially, earns them a financial reward.
For a free, confidential consultation, contact Silver Law and the Law Firm of David R. Chase online or call us today at (800) 975-4345.