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Private Placements- Know the Risks Before Investing

With increasing frequency retail investors are encountering scenarios in which they are offered an opportunity to invest in a private placement. A private placement – often referred to as a non-public offering – is an offering of a company’s securities that are not registered with the Securities & Exchange Commission (“SEC”). Under the federal securities laws, a company may not offer or sell securities unless the offering has been registered with the SEC or an exemption from registration applies.


When an investor decides to purchase shares in a publicly traded company, or for that matter purchase shares in a mutual fund or exchange traded fund (“ETF”), he or she will have the opportunity to first review a comprehensive and detailed prospectus required to be filed with the SEC. When it comes to a private placement, however, no such prospectus need be filed with the SEC – rather, these securities are typically offered through a Private Placement Memorandum (“PPM”).

The majority of private placements are offered under an exemption from registration requirements known as SEC Regulation D (“Reg D”). Among other things, Reg D provides certain safe-harbor exemptions to securities registration, and furthermore specifies the amount of money that can be raised in an offering, as well as the type of investor who may be solicited to invest in such a non-public offering. With certain exceptions, only retail investors who meet the “accredited investor” standard are permitted to invest in a private placement. Rule 501 defines an accredited investor as any person whose net worth exceeds $1,000,000 (excluding their residence), or alternatively who has income in excess of $200,000 per year ($300,000 jointly with a spouse) for the two most recent years.

Private placements might involve investing in a company’s stock in the form of shares, preferred stock, or even a debt instrument such as a bond, promissory note or debenture offering. When making an investment in a private placement, you should first receive and carefully review the PPM. The PPM is required to disclose all material facts about the investment. Any misrepresentation or any omission of a material fact necessary to make the statements in the PPM not misleading could give rise to liability where an investor suffers losses and the PPM is misleading or omits certain critical information.


An investor considering a private placement should be aware of their risks and be on the lookout for any potential red flags. In fact, the Financial Industry Regulatory Authority (“FINRA”) has previously issued an investor alert to inform the public about the risks and the potential for fraud and sales abuse concerning private placements.

To begin, FINRA has cautioned that by virtue of their limited offering documents (PPM versus more detailed prospectus), private placements will likely only provide prospective investors with limited information concerning a company and its financials. In addition, FINRA has warned investors about the illiquid nature of most private placement investments — before investing, an informed investor should first determine if he or she can allow their money to remain tied up for an extended period of time (usually several years) because private placement securities cannot be easily resold due to restrictions on their resale and the lack of a public market such as a stock exchange on which to sell them.

FINRA has also alerted investors to be very cautious of any private placements that you hear about through spam email or cold calling. Often, this is a red flag and a sign of fraud, and an investor should proceed with the utmost caution.


If you have purchased unregistered securities through a private placement – and you have suffered considerable losses due to what you believe involved fraud, sales abuse or an unsuitable recommendation by a broker – you may be able to recover your losses in FINRA arbitration. To find out more about your legal rights and options, contact a securities arbitration attorney at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or for a no-cost, confidential consultation.

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