The Financial Industry Regulatory Authority (FINRA) has issued a warning to investors about the potential dangers of private placements and other unregistered offerings, including real estate investment trusts (REITs). According to FINRA, private placements are illiquid securities, meaning that there is no clear market for these securities after the placement. As a result, investors are often compelled to hold onto these securities for a term of years or until cash-out provisions are available, and the market for these securities is often far less than what was initially paid.
Private placements are created to raise money for ventures that do not want to go through the more expensive public offering process. However, private placement firms often pay higher than normal commissions to brokers recommending their products. In many cases, less costly options are available in comparable listed securities with low or no commissions.
FINRA warns that a member or associated person should consider “reasonably available alternatives” offered by the member as part of having a “reasonable basis to believe” that the recommendation is in the best interest of the retail customer. For complex or risky products, including private placements, this involves considering whether lower risk or less complex options can achieve the same investment objectives.
FINRA instructs its members to diligently conduct a reasonable investigation of private placements. This includes responding to red flags in any prospectus or offering document. For example, early returns in these offerings are often paid from the offering proceeds, not from profits or positive cash flow.
FINRA warns that private placements are closely monitored, and brokers must follow specific rules when recommending them to customers. These rules, known as FINRA Suitability Rules and the SEC’s Reg BI Care Obligation, require brokers to exercise reasonable care and skill and make recommendations that are in the customer’s best interest based on their investment profile and the potential risks, rewards, and costs associated with the recommendation. Brokers cannot prioritize their own interests over the customer’s interests.
Investors should be wary of any private placement recommendations. If you have REITs or other non-traded securities in your account and have suffered losses, the Mark Tepper Law Firm is offering a FREE case evaluation to determine whether your broker’s recommendations were unsuitable for your investment and retirement needs. To initiate the process, you can contact Attorney Mark A. Tepper by sending an email to askmark@marktepper.com or calling 954-704-2310.