SCC Cautions Virginians to Understand Private Offering Risks

Financial

JUN 23, 2020

RICHMOND – The COVID-19 pandemic has caused significant market volatility during the past several months, leaving many individuals looking for safe places to put their hard-earned money and still earn a return. The State Corporation Commission’s (SCC) Division of Securities and Retail Franchising (Division) urges Virginians to use caution when considering investments in exempt securities offerings, also known as private placements.

A private placement is a security offering that is not required by law to be fully registered with federal or state securities regulators. Popular especially with start-up companies, private placements allow companies to sell stocks, bonds or other securities to investors without completing the rigorous disclosures necessary in a registered – or public – offering. Selling securities through private placements is generally easier, quicker and less expensive for the issuer than conducting a registered securities offering. Private placements often are riskier than registered securities offerings and may provide only limited opportunities for investors to resell them, so investors could have to hold onto them for longer periods of time.

“People may try to capitalize on headlines to prey on unsuspecting consumers,” said Division Director Ron Thomas. “Don’t assume that just because someone claims to offer a security with a valid exemption from registration that this is actually true. Keep in mind that even when a private security offering is legitimate, it may not be right for you. As with any investment, do your homework and thoroughly understand the risks and benefits,” he said.

Businesses raising capital through private placement offerings may have limited operating histories and modest revenues compared to public companies. These offerings are not reviewed by regulators and the people selling them are not required to provide as much information to investors as public companies are required to provide under securities laws. As such, investing in private placement offerings may be more appropriate for the sophisticated investor and less suitable for less experienced investors. Regardless of your level of investment experience, the SCC urges investors contemplating private placement offerings to use caution.

The most recent enforcement statistics collected by the North American Securities Administrators Association, of which the SCC’s Division of Securities and Retail Franchising is a member, identified private placement offerings as one of the most frequent sources of enforcement actions by state securities regulators.

Thomas urges Virginians to protect themselves financially when considering any investment opportunity by doing the following:

  • Carefully review and understand all documents associated with the investment.
  • Ask for information about the company, its business model and its executives.
  • Be wary of “unique” investment offers or high-pressure sales tactics.
  • Verify whether the person offering the investment is properly licensed or registered, as well as whether they have any disciplinary history.

Virginians can do this by contacting the Division of Securities and Retail Franchising in Richmond at 804-371-9051 or toll-free at 1-800-552-7945. For more information, visit the Division’s website at www.scc.virginia.gov/pages/Securities-Retail- Franchising or visit the North American Securities Administrators website at www.nasaa.org/22284/informed-investor-alert-private-placement-offerings/.

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Contact: Katha Treanor (804) 371-9141