Illiquid, unregulated private placement investment offerings are worrying state regulators, who are charged with protecting the investing public from investment scams, according to a recent article in InvestmentNews by Bruce Kelly. They are known as “Reg D” offerings. There were 26,485 of Reg D offerings in 2008 ($609 billion) compared with 11,000 in 1996, according to the article.
Public securities offerings must be generally be registered under the Securities Act of 1933. Registration protects investors, at least in theory, by requiring disclosures, including audited financial statements, and review of those disclosures by a gatekeeper, the U.S. Securities and Exchange Commission, which can prevent an offering from being made when there are deficiencies in the registration.
Regulation D provides a number of exemptions from the registration requirement, thus removing that gatekeeper protection. Rule 506, the most commonly used Reg D exemption, provides an exemption without any limit on the offering amount, so long as offers are made without general solicitation or advertising and sales are made only to “accredited investors” and a limited number of non-accredited investors who satisfy an investment sophistication standard. In general, an “accredited investor” is a person with a net worth exceeding $1,000,000 or annual income in excess of $200,000 (or $300,000 jointly with a spouse).
The theory is that an “accredited investor” is able to detect and avoid ponzi schemes and other investment scams. The reality, as we have seen in the Madoff and Stanford ponzi schemes, is that being moderately well-to-do, or even fabulously well-off, does not equate to financial sophistication. Moreover, even the regulators ? presumably savvy persons ? were duped by Madoff. In sum, so-called accredited investors are vulnerable to financial predators and in need of protection.
Yet, in 1996, Congress amended the Securities Act to prevent state regulation of certain securities, including Reg D offerings, as the article points out, state securities regulators are often in a better position than federal regulators to detect fraud.
Since issuers have been mostly unable to access the IPO market for the last two years, most offerings are being filed under Reg D. Sellers of Reg D offering typically receive very high commissions of 5% to 8%, compared with 1% to 4% for selling a mutual fund. This reminds many of the circumstances that led to the Prudential Securities Limited Partnership scam in the late 1980s, where more than 100,000 people invested $1.4 billion in limited partnerships that were misrepresented as being safe and turned out to be worthless. These problems were chronicled in a best-seller called “Serpent on the Rock,” by Pulitzer prize winning author Kurt Eichenwald.
J. Boyd Page, senior partner of Page Perry in Atlanta, whose limited partnership cases were featured in “Serpent on the Rock,” said: “High oil prices and an unstable real estate market have provided unscrupulous promoters an opportunity to take advantage of investors with the result that real estate and oil and gas investment scams are flourishing. Investors should seek legal advice before they commit their hard earned money to one of these ventures.”
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 30 occasions. Page Perry’s attorneys are actively involved in representing investors in securities cases. For further information, please contact us.