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Beware Private Placements; Risky Investments for Most

By  of Shustak Reynolds & Partners, P.C. posted on Saturday, November 26, 2011.

We see more and more private placements being sold to unsuspecting investors, most of whom have little or no idea of the risks inherent in these investments. With very few exceptions, a private placement is a high risk investment; typically highly illiquid and not suitable for most investors. The first question, of course, is what is a private placement? Private Placements are securities sold in a private, versus a public offering, to a limited number of investors. These are securities, typically shares of stock, convertible or preferred stock, promissory notes or bonds. These private placements have not gone through the scrutiny which usually accompanies a normal, public offering of a security and no governmental agency, including the SEC, FINRA or any State securities department, has reviewed, passed upon or approved the investment. Private placements are sold on the basis of an exemption from, not in compliance with the various federal and state securities laws. They are illiquid in that there is no public marketplace for selling them like buying and selling shares of Apple or any other publicly traded company. Once purchased, the investor usually is “stuck” holding the private placement. In the past few years, there have been major frauds, amounting to billions of dollars, of unsuitable private placements which have failed, including DBSI, Provident Royalties and Medical Capital Financial. The commission structure for a broker selling a customer a private placement is very high, often as much as 10% or more of the total amount paid. Studies have shown that brokerage firms which sell private placements often do little due diligence on the actual investment and systemically, the due diligence made on these investments is sloppy, at best. On the risk pyramid, private placements are at the very top of the pyramid, representing the highest level of risk. Private placements never should constitute more than approximately 5% of an investors portfolio and they typically are unsuitable at any percentage for most investors, particularly seniors and conservative investors. If you are considering purchasing a private placement, or if you have been induced into buying one or more and feel the investment is unsuitable for you, contact our firm’s managing partner, Erwin Shustak, an experienced securities fraud attorney, at 888.748.8748, or [email protected], for a no obligation consultation. Visit our web site at www.shufirm.com for more information.

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