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What Entrepreneurs Need to Know About Working with Brokers Doing Private Placements

4 Mins read
  • You should find out if private placements are right for your retirement strategy and consider finding a broker that specializes in them.

Are you trying to diversify your investment portfolio as an entrepreneur? This can be an important idea. You don’t have the luxury of having an employer that puts money in a 401k on your behalf, since you have to be responsible for managing your own retirement strategy as an entrepreneur.

You need to be an informed investor as an entrepreneur. This means that you should be aware of the different investment options available and vet your broker carefully. You need to think of choosing a broker like hiring an employee for your company.

As an entrepreneur planning for retirement, one thing that you should think about is finding a broker that sells private placements. This can be a worthwhile investment opportunity that will help leverage the money that you made from your business.

What Are Private Placements and Should Entrepreneurs Invest in them as Part of their Retirement Strategies?

Private placements are often a risky investment, but they can be quite lucrative.  Instead of investing in stock or other securities after a public offering, many investors seek to invest in smaller companies or businesses that are more closely owned.  These companies may offer bonds or common stock, or other securities, to private investors rather than through public offerings.  These investments are known as “private placements.”

If your broker is trying to push you into investing in a private placement or you have already put your money into a private placement, there are many risks and problems you could run into.  We’ll explain some of these risks and problems surrounding private placements and why FINRA cautions so many investors against working with brokers that push private placements. This is a much different game from entry level investments like mutual funds, 529 college savings plans, and the like – if you think your broker is trying to earn unnecessary fees by lobbying for complex and expensive placements, you may need to call an attorney.

Risks of Investing in Private Placements

From the perspective of a company offering stock, bonds, or other securities as a private placement, private placements seem great.  Offering investments this way is often cheaper than taking a company public.  This is one of the reasons that stock market investing is so popular.

In addition, companies do not need to go through the stress of registering an IPO (initial public offering) with the Securities and Exchange Commission (SEC) because private placements are unregistered securities.  Instead of being handled under the same rules as public investment options, these are handled under separate rules known as Regulation D.

For investors, some red flags should already be raising.  The SEC is responsible for creating many of the federal regulations on investments and securities, so securities that are not registered with the SEC automatically have a higher level of risk and potential for fraudulent investing.

A second risk that comes with most private placement investments is the age of the business.  An IPO or offering for private investments can come at any point in a business’ life cycle, but placements like these are often offered when a company is young and needs capital to grow and get off the ground floor.  That means many of these investments are automatically riskier than investing in established stocks, money markets, or other investment products.

Private placements are not commonly purchased as investments by individuals, so if your stock broker pushes these investments, it is automatically worth investigating cautiously.  Many pension funds, insurance companies, and other institutions are the primary investors in these products.  In fact, these investments are subject to additional rules, just to make sure that private investors understand the risks they are taking.  Private placements cannot usually be purchased by individual investors unless they have at least $1 million in assets or earn at least $200,000 per year ($300,000 if married).  This and other requirements help ensure that only financially literate individuals that can understand the risks can get involved with private placements in the first place. A common scenario would be for a high net worth individual with no extra time, like an attorney known for settling car accident claims, to ask his broker about aggressive investments.

A broker-dealer or other investment professional or financial planner that pushes you into investing in a private placement may not have your best interests in mind.  These investments often have large transaction fees and are a great way for the broker to make some extra money.  If an investor has a high net worth and could qualify to invest in these, brokers might look to exploit this by encouraging you to invest in unsuitable investment products like these just to ensure they get a cut of the fees and charges until the investment ultimately fails.  Always take caution before trusting your broker with these investments.

Filing a Claim for Unsuitable Private Placement Investing

Even though these securities are not registered with the SEC, they still fall under the SEC rules from Regulation D.  In addition to these rules, there are dozens of other regulations handed down by the Financial Industry Regulatory Authority (FINRA).  These rules work to ensure that security brokers and financial advisors give their investment clients proper disclosures to inform them of what they need to know about an investment, that they charge fees in a reasonable way, that they disclose conflicts of interest, and that they otherwise avoid taking advantage of less financially-savvy investors that come to them for help.

If any of these FINRA rules are violated, the broker that violated them could open themselves to a FINRA claim. If a broker behaves badly enough, he may even need to defend himself from a criminal charge. FINRA allows investors who have been harmed by underhanded dealing or brokers who have taken advantage of them to file a case for FINRA arbitration to get damages.  These damages can help compensate you for the harm you suffered.

Financial brokers submit themselves to these FINRA claims as a condition of maintaining their broker-dealer license, which helps give investors a way to get help if they’ve been taken advantage of.

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Ryan Kh is a big data and analytic expert, marketing digital products on Amazon's Envato. He is not just passionate about latest buzz and tech stuff but in fact he's totally into it. Follow Ryan’s daily posts on Catalyst For Business.
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