The regulatory agencies required all offers of buying and/or selling to be registered unless they are exempt. When an offer is exempt, they are frequently called private placement. Private placements are not subject to certain laws and regulations that are put in place to protect investors.
Many factors must be evaluated before you invest in an exempt offer. These are five things one should review before diving into one of these deals:
- Promises of high returns
This is a major red flag. All investments are subject to a certain degree of volatility and risk. High return investments are often associated with risky investments due to the probability of multiple outcomes. If you hear the words high returns and low risk, be cautious!
- Status of Investment Professionals
Find out if your investment professional or advisor is registered with the state or the SEC. Most fraudulent practices involve unregistered individuals. Regardless of your relationship with the advisor, always check their registration status. You can visit FINRA’s https://brokercheck.finra.org/ and the SEC website https://adviserinfo.sec.gov/IAPD/Default.aspx . The advisor should provide you with the CRD# found in their ADV 2A form. You can always call the SEC (800) 732 – 0330 and search the internet.
- Sales Tactics
Go with the opposite of fast. If they are pitching you an idea where you have to invest quickly, be wary. Proper research must be done. Ask them so show you in writing the strategy and benefits of the product. If you receive unsolicited investment offers regardless of the source, consider the agenda of the person providing you with this “opportunity”. Even if it is coming from a friend, he might just be relaying information they received from a fraudulent unknown source.
- Clarity and Proof of Documents
We mentioned in the previous point to ask for documents describing the benefits of the product offered. Lack of a brochure or written research can lead to disagreements down the road. The majority of investment products, even private placements, have detailed literature. Look for mistakes to question, even in spelling.
- Accredited Investors
The majority of private offerings involving securities limit to whom they can be proposed under federal laws. For private offerings, the law requires clients who are considered accredited investors. Any advisor or seller who wants to offer private products without inquiring your financial information could be violating the law or running a scam. So, who are accredited investors? You can read a detailed guideline here:
In the end, the best advice is to ask questions and be informed. By following the five points above, you should be better prepared for any type of investment proposal.
Alex Lopez O’Bryan