Beware of the risks of investing in a Private Placement
Many investments sold in wealthy communities fall under the category of “private placements”, which can primarily only be sold to “accredited investors”. While this article may seem like an academic discussion of investing terminology, I have seen financially secure families suffer financial devastation as a result of investing in “private placements.” Below are some reasons to avoid these types of investments, even though they are presented to you as great opportunities that are only available to high-end investors.
A “private placement” is an unregistered, often speculative and illiquid investment sold in accordance with a complicated and lengthy legal document called the PPM (Private Placement Memorandum). Since these investments are risky and unregistered, they are generally only available to “accredited investors,” who are typically investors with certain levels of net worth or annual income. The “private placements” that are offered and sold to “accredited investors” include start-ups, hedge funds, private equity and venture capital funds, cryptocurrency-related investments and NFT, to name a few.
The concept is that “accredited investors” need less protection against bad investments. However, net worth and income have never been fully correlated with the ability to analyze speculative, illiquid, unrecorded investment. In addition, this concept of an “approved investor” has become more imperfect, as the inflation-adjusted income and net worth levels required to qualify as an “approved investor” have declined significantly over the past several decades. As a result, investors who are considered “Certified” now include many investors who cannot afford to lose their entire investment.
This problem of defining “approved investor” is compounded by the dramatic rise in most investment markets in recent years. Specifically, the dramatic rise in the stock market, real estate market and cryptocurrency market lately has convinced many investors that the investment risks are not as great as those shown in the risk sections buried within. “Private Placements”.
The above reality allows promoters to offer speculative “private placements” to investors who may not fully understand and appreciate the risk of the investment, or may not be able to risk a total loss of the funds invested.
Remember, whatever the case, let’s make sure our money is working for us and not for someone else. ??
– Chris Vernon is an attorney with the Vernon Litigation Group which represents investors in financial litigation in the United States. He is also licensed as a Registered Investment Advisor. The courts accepted Mr. Vernon as an expert on investment issues as a lawyer and investment professional.