A private placement is an offering of securities by a company that is not offered to the public at large and is not registered with the SEC. Many of these offerings are made pursuant to Regulation D of the Securities Act of 1933. Generally, one must be an “accredited investor” to make an investment in a private placement. Institutions such as banks and insurance companies, and organizations or trusts with assets of $5 million or more, are accredited investors. For an individual to be an accredited investor, the person must have a net worth of $1 million or more, excluding the value of the person’s primary residence, or an income of more than $200,000 in the two most recent years.
Gerri Walsh, a senior executive at FINRA, warned that private placements are often issued by companies that have no requirement to file financial reports, and this can lead to difficulty for investors trying to evaluate the financial health of the company. Because of the issues with liquidity and risk, Walsh said that investors should carefully consider their options before investing in a private placement.
While private placements are not new, FINRA recently uncovered fraud and sales practice abuses related to private placements, including offering documents that contained inaccurate statements.
FINRA said that if an investor is presented with a private placement offering document, it should be reviewed carefully. According to the investor alert, people considering investing in a private placement should find out as much as possible about the company’s business and what the options are for liquidating one’s investment. The organization also said that any such investment should be discussed with one’s broker in detail beforehand.
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Gerri Walsh, a FINRA senior executive, said that if you are not sure if the person you are talking to is a legitimate representative of a brokerage firm, the best course of action is to quickly end the call and then call the firm’s customer service department.
FINRA said that investors who suspect they have been victims of this type of scam should contact their financial institution immediately to report theft through electronic funds transfer. People who believe their identity may have been stolen should follow the Identity Theft action plan available on the website of the Federal Trade Commission.
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