" In matters of truth and justice, there is no difference between large and small problems, for issues concerning the treatment of people are all the same." - Albert Einstein

Private Placements

The traditional means of raising capital by companies is through an initial public offering (IPO) by which anyone could become an investor and buy securities. An alternative to this typical capital raising is the private placements that involve the sale of securities to a relatively smaller group of qualified investors. Not everyone could be sold the securities under Private placements. There are criteria set by the market regulators to become a qualified investor to participate in private placements. It is the responsibility of the broker to validate the investor before selling the security products to them through a private placement.

There are certain relaxations in rules by the market regulators for private placements. They are not as rigid and tight as in the case of initial public offering (IPO). Regulation D of the Securities and Exchange Commission (SEC) provides an exemption to companies from registering with them for private placement offerings. Private placements are sold using a private placement memorandum (PPM) instead of a prospectus that is mandatory in the case of initial public offering (IPO).

Market regulators have found significant problems during the private placement that include but not limited to

  • Fraud by broker/company
  • Misrepresentations and omissions in sales materials and offering documents
  • Conflict of interest
  • Lax in the due diligence by the brokers in choosing the qualified investors
  • Money laundering

The market regulator requires the broker to

  • Investigate and analyze the private placement, the issuer and its management
  • Do a comprehensive study of the business prospects of the issuer
  • Verify the claims made by the issuer in the offering materials
  • Understand fully the intended use of the proceeds from the private placement
  • Ensure the investors are qualified as per the criteria set up by the market regulator
  • Ensure the risks and other market factors are transparent to the investors
  • Ensure there is no misrepresentation or hiding of any data
  • Disclose any conflict of interest

In the past, many investors have witnessed dramatic wealth destruction because the brokerage firms ignored the red flags, did not comply with the rules for their selfish monetary gains. The brokers even sold the wrong product to the wrong client without the due diligence to check if the investors are qualified to participate in the private placement.

Please contact South Texas Securities Co. if you have experienced losses in your private placement investments.