The Facts About Private Placement Fraud: False Statements Made In Connection With Private Securities Offerings


Every year, businesses raise billions of dollars through private offerings of securities that are not registered.  Viewed in that light, it seems clear that private placements serve as a critical source of capital for small companies.  Unfortunately, too many investors become victims of fraudulent private offerings.  Stated otherwise, private offering fraud occurs far too frequently.

            If your broker recommends the purchase of a security in connection with a private offering, you should know that both he and his firm have an obligation to conduct a reasonable investigation of the representations that have been made by the issuer (i.e., the company that will be receiving the bulk of the proceeds).  The scope of the investigation depends on the overall circumstances of the offering.  Generally, a broker cannot rely blindly on the issuer’s statements.  If your broker has neglected to satisfy its duties to investigate the issuer pursuant to an offering made under Regulation D (Reg. D), this failure can result in a finding of liability.  A case that was previously filed by the SEC illustrates this reasonable investigation requirement.  Per the SEC charges, a broker pitched an unregistered offering of securities.  According to the SEC’s allegations, the broker said the company had more than $2 billion in order backlogs.  But in reality, the backlog never exceeded $42 million.  Suffice to say, this misrepresentation should have been detected.


            Private offerings are customarily made through the use of a Private Placement Memorandum (PPM).  Generally speaking, a PPM should contain an entire segment discussing the various risks associated with companies operating within that industry.  Significantly, however, a general discussion of risk factors will not suffice.  To that end, an analysis of the specific risks that are unique to the particular offering must also appear.


            If you are the victim of private placement fraud, consider the merits of speaking with a private placement attorney.

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