Regulation D Private Placements and How They Can The Lead To Investor Losses

Private placements are often used by companies to raise investor funds. Not available to the general investing public, these investment offerings are usually offered to a limited pool of investors—either accredited investors or those that qualify for certain exemptions or fulfill specific criteria. While federal securities laws generally require companies selling securities to register them with the US Securities and Exchange Commission (SEC), Regulation D offerings do not have to fulfill this requirement. Instead, the issuer must submit a “Form D” with the Commission that basically announces it is raising funds through an unregistered securities offering. Few details about the investment are included.

Reg D investments, also known as 506 offerings, are usually offered via a Private Placement Memorandum (PPM) rather than a prospectus. Once they are purchased, an investor cannot resell them unless they can identify their own “exemption.” Also, because there is no secondary market for Reg D securities, they are impossible to price and there is no way to determine their actual value. This is why they are often listed at their selling price on statements. All of these contribute to making Reg D offerings risky, illiquid, and non-transparent. These are some of the reasons they are unsuitable for most retail investors, inexperienced investors, retirees, and conservative investors.

Shepherd Smith Edwards and Kantas (investorlawyers.com) represents investors who have suffered serious Reg D investment losses because their broker-dealer unsuitably sold them these high-risk unregistered securities. Not only do Reg D/506 offerings lack the oversight and protections that investors might otherwise have received from an SEC-registered investment, but also they tend to pay brokerage firms high commissions and fees. The latter can incentivize financial advisors to sell them to customers that lack the risk tolerance level and investing experience required for these types of private placements. 

That said, there are also high-risks to accredited investors who have invested in Reg D offerings. According to Shepherd Smith Edwards and Kantas Managing Partner and Reg D investor loss lawyer Sam Edwards, “Right now, a ton of the Reg D offerings outstanding are still listed as being worth par on people’s statements, and as long as they are paying as promised, investors typically don’t ask many questions. However, the rapid rise in interest rates is going to kill many of these offerings (most are not equity offerings, but rather high paying bond offerings), as many do not have a way to “repay” the money when the bond comes due and had planned to essentially “refinance” the offerings. Unfortunately, increasing interest rates are going to make that likely impossible, which will, I believe, result in a ton of these defaulting in the next few years.”

According to SLGG Economic Consulting:

• Between January 2009 and July 2022, $20.1 trillion - $25.1 trillion in Reg D offerings were sold.
• Around $.7.7 trillion of Reg D securities were sold by broker-dealers.
• Brokerage firms earned around $32.4B in commissions.
• More than 64,000 of the Reg D issuers that put out offerings during this period are either now defunct, delinquent, or voluntarily dissolved.

In August 2022, the SEC issued a bulletin reminding investors that unregistered securities, including Reg D offerings, may be used in investment scams.

If a brokerage firm marketed and sold you regulation D securities, you may be able to pursue damages if they failed to conduct proper due diligence into this offering, unsuitably recommended this investment to you, made misrepresentations or omissions, or engaged in some type of broker negligence or misconduct. Even if your broker-dealer was not aware that one of their financial advisors was unsuitably selling Reg D offerings to you, they may still be held liable for their failure to supervise their registered representative and your brokerage account.

Determining brokerage firm negligence can be challenging, and here is where our skilled Reg D investor loss attorneys can help. For over thirty years, Shepherd Smith Edwards and Kantas has been fighting for investors like you in arbitration, mediation, and litigation. We have recovered many millions of dollars on our clients’ behalf.

Assessing whether you are the victim of broker misconduct or investor fraud will be the first step, and we can help you explore your legal options during your free, no obligation case assessment. Should we agree to work together, we can prepare and file a Financial Industry Regulatory Authority (FINRA) lawsuit on your behalf against your broker-dealer and represent you during the arbitration hearings. Our FINRA lawyers have collectively recovered many millions of dollars for investors.

Call Shepherd Smith Edwards and Kantas at (800) 259-9010 today.