Private (Reg D) offerings, which allow companies to raise money from investors off the regulatory radar screen, are tempting to some investors in this low interest rate environment, but beware: sellers often do not disclose all the important risks associated with these investments, according to Alexis Leondis’s Bloomberg article, “Private Placements Woo Investors with ‘Nowhere to Go.'”
Almost 60,000 companies a year receive $25 billion in capital from individual investors, according to the article. Private offerings related to real estate and oil and gas are proliferating, especially those focused on green energy.
Complaints about private placements to the Financial Industry Regulatory Authority (FINRA) have increased 35 percent this year and more than 50 percent in 2009.
“Issuers are targeting the elderly because they’re the ones with retirement accounts and equity in their homes,” Michael Hines, Utah’s director of enforcement, was quoted as saying.
Investors are attracted to private offerings because of the promised high yields and lack of correlation with the stock market. But a promise of a high fixed payout on an investment is a red flag, according to FINRA’s John Gannon, a senior vice president of investor education.
Private offerings are supposed to be sold only to so-called “accredited investors,” who are deemed to be financially sophisticated and must have a net worth of $1 million or $200,000 in annual income. However, those were the net worth and income criteria in 1982, and the Securities and Exchange Commission has not updated them to reflect the fact that many more individuals who are not financially sophisticated or wealthy in today’s financial environment meet those criteria.
In addition, private offerings are “off the radar screen” because there is no regulatory review of the offerings prior to sale. “The information investors often get is 99 percent positive, so based on trust they get taken in and end up losing money they’ve saved for retirement,” Manning Warren, a law professor at the University of Louisville’s Brandeis School of Law in Kentucky, was quoted as saying, adding: “At best they don’t get enough disclosure to understand the risks involved, and at worst, these investments turn out to be totally bogus.”
As has been widely reported, investors lost more than $1 billion in private-placement securities issued by Medical Capital, which financed medical receivables, and about $485 million in Provident Royalties securities, an oil and gas investment firm. Both companies are in receivership and the SEC has filed fraud cases against them.
“We knew there was going to be a fire in the forest with these things,” Joe Borg, director of the Alabama state securities commission, was quoted as saying, adding: “But we had to watch them light the match and couldn’t do a damn thing.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions, and have aided clients who have been the victims of financial adviser abuse and scams. Page Perry’s attorneys are actively involved in counseling institutional and individual investors regarding private offering problems. For further information, please contact us.