The U.S. self-regulatory organization, the Financial Industry Regulatory Authority (FINRA), issued a new investor alert Tuesday warning investors about the added risks of investing in private placements.
FINRA warns that investing in these sorts of exempt market deals is risky and that they can lack liquidity. It advises investors that they should carefully review any sort of offering document, and ensure that statements by their broker are consistent with that disclosure.
The alert also contains a series of tips to help investors determine if a private placement is right for them, including recommendations for carrying out due diligence on a company’s business, and the market for its securities.
It suggests that investors ask their broker about the information they were able to review about the issuing company and the private placement; and, it warns that investors should be “extremely wary” of offerings presented without advice from their broker, and deals offered through spam emails or cold calling. “They are very often fraudulent,” it warns.
“Investors should understand that many private placement securities are issued by companies that are not required to file financial reports, and investors may have problems finding out how the company is doing,” said Gerri Walsh, FINRA’s senior vice president for investor education.
“Given the risks and liquidity issues, investors should carefully assess how private placements fit in with other investments they hold before investing,” Walsh added.