SEC Cracks Down on Private Placements

Gives investors a list of red flags to identify fraudulent transactions.

The US Securities and Exchange Commission recently issued an “investor alert” designed to help investors identify potentially fraudulent private placements. The SEC’s Office of Investor Education and Advocacy gave the following list of red flags (courtesy of a note by David Kravitz of Katten Munchin Rosenman LLP): 

• claims of high returns with minimal risks;
• securities being offered by unregistered investment professionals;
• aggressive sales tactics, including those that create a false sense of urgency on behalf of the investor;
• “sloppy offering documents” or the absence of any offering documents;
• offerings that do not request investors’ net worth, which is required information for many types of private securities offerings;
• offerings in which no person other than the sales person seems to be involved;
• issuers of securities that have offices or mailing addresses in states in which they have no legitimate business operations;
• failure of the issuer to be in good standing in its state of incorporation or formation;
• unsolicited investment offers; and
• suspicious or unverifiable biographies of managers or promoters.

The Office of Investor Education and Advocacy provided the following list of best practices (again, via Katten Munchin): 

• check the background of the investment professional proposing the investment, either via the Investment Adviser Public Disclosure website or Financial Industry Regulatory Authority, Inc.’s BrokerCheck website;
• understand the investment and the business strategy;
• beware of con-artists using high-pressure sales tactics; and
• ask questions about the promoter and the investment, making sure to obtain clear answers—including through researching unbiased resources—before making an investment.

Mr. Kravitz notes that issuers should take these guidelines into consideration when fashioning their own private placements to avoid investor push-back that could delay or otherwise stymie a transaction.