Be wary of private placement investment hype

From Palm Beach Daily News

Posted: 12:01 a.m. Sunday, Sept. 22, 2013

MANAGING YOUR FORTUNE

Be wary of private placement investment hype

By Gail Liberman

Special to the Daily News

Starting Monday, expect to be wined, dined, coddled and bombarded with ads and other marketing tools aimed at convincing you to invest in private placements.

That’s due to the elimination of an 80-year ban on advertising and soliciting for these loosely regulated investments that were generally off-limits to all but the wealthy.

Private placement offerings typically let companies raise business capital without meeting public securities registration requirements. New Securities and Exchange Commission rules, waiving the advertising and solicitation ban on private placements, fall under the federal JOBS Act, aimed at jumpstarting the economy.

To invest in most private placements, you must be “accredited.” Generally, this means you must have:

* A net worth, not including your primary residence, of at least $1 million.

* Or, an income exceeding $200,000 annually, excluding your primary residence, in each of the two most recent years.

State regulators long have complained that private-placement offerings are their most frequent source of enforcement cases.

The Financial Industry Regulatory Authority also cites sanctions of firms and individuals whose private placement memoranda and sales materials contained inaccurate statements. Some materials omitted important information and some firms failed to adequately investigate the issuer to determine if private placements were suitable for clients, FINRA warns.

Expect limited information about a company’s business, if you get it at all, and expect problems gauging a company’s performance and future performance.

The lifting of the solicitation ban comes as The Wall Street Journal indicates that hedge funds, often organized as private placements, lately have been lowering fees. The average hedge fund charges an annual management fee of about 1.6 percent of assets, while claiming around 18 percent of investment gains. That compares with a standard charge of 2 percent of assets under management and 20 percent of investment profits. Investor disappointment over poor performance has been cited for the fee cut.

If you are badgered to invest in a private placement, FINRA offers these tips:

* Understand if, how and when you might liquidate your private placement investment.

* Interrogate your broker about the company’s risk factors, including competitors and economic risks.

* Make sure your salesperson discusses how the investment fits in with your other investments and why it’s right for you.

* Read the issuing company’s Form D, available on the SEC’s company data base at www.sec.gov.

* In real estate private placements, make sure the company’s income can cover distributions. Beware of leverage.

* For oil and gas private placements, know what will trigger a loss. Find out whether agreements with affiliates could dilute your returns and whether you will get audited financials of the issuer.

* Expect that private-placement offerings hyped through spam email or cold calling likely will be fraudulent.

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