SEC Warns Investors of The Risks of Private Placements

Posted on October 7th, 2014 at 4:00 PM

From the Desk of Jim Eccleston at Eccleston Law Offices:

In a recent Investor Bulletin as well as an Investor Alert, the Securities and Exchange Commission (SEC) has issued warnings to investors as to the risks of “private placement” investments.  The SEC includes in its discussion those private placements that have filed for an exemption from registration under Regulation D, as well as those private placements that have not and which more likely are a fraud.  Let’s examine the key points contained in the SEC warnings.

First, the SEC reminds investors that private and public companies may utilize private placements (also known as unregistered offerings) as a legitimate means to raise funds from investors.  To be a legitimate offering of securities, companies must register the securities with the SEC or must file for an exemption from registration.  To file for an exemption, companies must file a document called “Form D” with the SEC no later than 15 days after they first sell the securities in the offering.  Form D will include a brief description of the company (the “issuer”), its management and promoters, and the offering itself.  One can search for Form D filings on the SEC website. 

Second, there are three particular SEC rules under Regulation D which govern the size and type of offering that can be exempt from SEC registration.  Basically, small offerings (up to $1 million in any 12 month period) sold to anyone without any specific disclosure requirements fall under the Rule 504 registration exemption.  Larger investments (up to $5 million in any 12 month period) sold to an unlimited number of “accredited investors” and a limited number of non-accredited investors, may fall under the Rule 505 registration exemption.  Finally, the Rule 506 registration exemption contains no offering size restrictions, and may be advertised generally to accredited investors.  Depending upon the type of registration exemption, and the type of investor (accredited versus non-accredited), the SEC urges investors to obtain and review all of the information that they can about the offering, including financial statements.  The SEC further urges that investors consider: the offering’s claims and expectations; reliance on a particular technology, customer or product; competitors; management experience and background; length of time in business; how the investor funds raised will be used; and restrictions on the sale of the securities.

Third, if an investor’s broker or adviser recommends a private placement, the SEC cautions that the broker first must conduct a reasonable investigation before recommending the investment to anyone.  This effort includes a reasonable investigation and verification of the issuer’s statements and claims.  Likewise, the broker must determine that the private placement is suitable for the particular investor based upon an investor’s risk tolerance, time horizon, financial situation, investment objectives and other factors.  Along those lines, the SEC warns, “Keep in mind that private placements can be very risky and any investment may be difficult, if not virtually impossible to sell.”

Fourth, and as explained in the SEC’s Investor Alert entitled, “10 Red Flags That an Unregistered Offering May Be a Scam”, fraudsters may use unregistered offerings to conduct investment scams.  The SEC warns that fraudsters “may try to lure” investors into believing that the SEC has approved an offering by pointing to its Form D filing with the SEC.  That would be a false statement as the SEC does not approve or disapprove offerings for which a Form D (registration exemption) has been filed.

Moreover, the SEC’s ten Red Flags are worth noting.  They are:

  • Claims of high returns with little or no risk;
  • Investment professionals selling the private placement are not registered;
  • Aggressive sales tactics;
  • Problems with sales documents (such as being incomplete, or having typos);
  • No questions asked regarding net worth or income in order to satisfy registration exemption requirements;
  • No one besides the salesperson appears to be involved in the deal;
  • Company address is a mail drop or virtual office;
  • The company is not in good standing in the state in which it was incorporated or formed;
  • Investment offer is unsolicited, confidential or secret; and
  • Managers or promoters have suspicious or unverifiable biographies.

 Fifth, when faced with any of those Red Flags, the SEC recommends asking questions from unbiased sources, and exploring both the SEC website and the websites of state regulators and FINRA (the Financial Industry Regulatory Authority).  Investors also need to do their homework to check the background of the broker and/or the promoter, understand the investment strategy, and be aware of the common tactics of fraudsters.  The SEC’s publications contain good advice!

The attorneys of Eccleston Law Offices represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 50 years in delivering the highest quality legal services.

Related Attorneys: James J. Eccleston


Return to Archive



Hiring Eccleston Law has been one of the best career decisions I have made and this "investment" to maintain my sterling regulatory record has been returned many times over.  If you are in a situation where you've been unfairly accused, don't hesitate to talk with Eccleston Law. They are the best.

Thomas C.


June 14, 2024
Wells Fargo Fires Employees for Faking Work

Wells Fargo & Co. recently terminated over a dozen employees following an investigation into allegations of fake work activities.

June 13, 2024
FINRA Struggles to Revise Outside Business Rules

The Financial Industry Regulatory Authority’s (FINRA) attempt to update its rules on advisors’ outside business activities has stalled, according to Robert Colby, FINRA's chief legal officer.

June 12, 2024
Tax Court Denies Madoff Victims $8.2 Million Deduction

Victims of Bernie Madoff's Ponzi scheme, Christopher and Silvana Pascucci, cannot claim an $8.2 million tax deduction for their investment in life insurance premiums.