One of the biggest problems I am seeing these days is private placements (also called alternatives or non-registered investments) that are sold to accredited investors through a private placement memorandum or PPM. Because these investments are not registered with the SEC the information that you can get about them is far more limited, and can even be fraudulent.
According to this article in the Wall Street Journal yesterday, sales of private placements are surging, as part of a broader rise in private capital markets. Private placements can be great opportunities, but they nearly always carry significant risk and in some cases they can be Ponzi schemes. Caveat emptor.
Aside from the risk, one of the biggest concerns regulators have is how the products are sold. FINRA has warned in the past about “fraud and sales practice abuses” by firms and brokers in the market. In some cases this may be due to the fact that these smaller, less known firms tend to hire troubled brokers for their track record in aggressively selling high-commission deals, sometimes using questionable tactics. Most of these firms are small to midsize brokerages, with fewer than 500 brokers, and are spread throughout the country.
According to the WSJ, more than 1,200 brokerage firms sold around $710 billion of private placements last year, and sales for the first five months of this year will be even higher. To make matters worse, securities firms with an unusually high number of “bad brokers” are selling tens of billions of dollars a year of private stakes in companies. The WSJ reviewed records of who was pushing these investments and identified over a hundred firms where 10% to 60% of the in-house brokers had three or more investor complaints, regulatory actions, criminal charges or other red flags on their records. This is not normal (always run your broker or advisor’s name through Brokercheck).
The bottom line is that investors are far more likely to be exposed to losses or fraud in private investments. If your broker or advisor recommends a private placement or “alternative” investment make sure he/she has a good track record and has done extensive due diligence.
If you get a cold call from a firm you’ve never heard of trying to convince you to invest in one of these, just say NO.
Copyright 2018 by Mark Pugsley. All rights reserved.