The following provides general background on, and underscores certain risks to Investors associated with, Private Placements.
- Private Offerings can be purchased directly from the Issuer of the Security during the Offering period or through an agented, “best efforts” process managed by a FINRA-registered Broker-Dealer acting as a Placement Agent. Under U.S. law, other than the Issuer, only registered Broker-Dealers can conduct Private Placements as third-parties and receive compensation for such services.
- Any type of company can raise capital in the amounts it needs through a Private Placement of Securities.
- Virtually any type of Security can be offered to Investors through a Private Placement, including debt (such as Promissory Notes) or equity interests (e.g., common stock, preferred stock or membership interest in a Limited Liability Company).
- Investment in privately placed Securities offers Investors a significantly expanded universe of investment alternatives, but Investors must also be aware of the greatly increased risks associated with these Securities.
Additional risks include:
- Illiquidity – Private Placements are “buy and hold” investments. “Secondary” trading (i.e., selling the Security before its maturity) is not allowed, and, so, Broker-Dealers do not make Secondary markets in Private Placements.
- Unaudited financial statements – There is no requirement that Issuers of private Securities have their financial statements audited by an accounting firm, though some do.
- Inconsistent pricing of similar Securities – Since there are no trading markets, the pricing of Private Placements carrying similar risk can vary significantly.
- Difficult to determine the ongoing value of the investment – The lack of Secondary markets makes it more difficult to determine independently the ongoing value of the investment, which is necessary for valuing personal financial statements and for estate-related transfers.
- Private Placements are subject to all federal and state Securities regulations, including those related to misrepresentation or fraud.