Private Placements, “Hedge Funds,” Limited Partnership Issues & Other Non-Conventional Investments
Investing in private companies that are not traded on exchanges poses risks related to unsuitability and illiquidity. If you notice your investments are illiquid, your broker may have sold you risky and unsuitable investments. You need a New York non-conventional investments law firm like Malecki Law to review your portfolio at no cost. If your broker recommended these types of investments without disclosing the true nature of an unregistered, illiquid investment, or recommended it despite failing to conduct proper “due diligence” on them before investing, you very well may have a case against the broker for money damages.
Private placements are unregistered securities, usually utilized by companies to help raise capital. Private placements are discrete rounds of investments offered privately, not publicly, to selected private investors and are usually suitable for high-net-worth and sophisticated accredited investors. If your broker recommended you purchase illiquid private placements, you may need a New York non-conventional investments attorney at Malecki Law to review your investments. Although private placements are not sold in the public markets, the SEC regulates them. There are various restrictions that must be complied with under Regulation D (Reg D). Therefore, private placements are generally complex investments and may not be suitable for you.
“Reg D” and Private placement regulation
Private placements are generally regulated by Reg D. Reg D is codified in Rules 501 – 508 of the Securities Act of 1933. Reg D provides exemptions for private companies when it comes to buying and selling securities. Under Reg D, private companies can raise capital without having to register the securities. The various exemptions to securities registration requirements are found in Rules 504, 505, and 506. It is crucial to highlight that Reg D regulates the transactions involving these securities, not the securities themselves.
Further guidance on the regulation of private placements can be found on FINRA’s website, https://www.finra.org/rules-guidance/key-topics/private-placements/filing-guidance#1_2.
Hedge funds “pool investors’ money and invest the money in an effort to make a positive return.” However, hedge funds tend to engage in speculative conduct, such as short selling, which is an investment strategy where the hedge fund bets on a given stock’s decrease in share price for expected profits. If your broker recommended you invest in hedge funds, you may need a non-conventional investments lawyer in New York at Malecki Law to review your hedge fund(s) in a free consultation. Due to the very speculative nature of hedge funds, they may not be suitable for you.
Limited partnership issues allow you, as a part owner, to invest in the partnership without management responsibilities. Generally, a partnership is an unincorporated organization consisting of general and limited partners. General partners can typically be subjected to an unlimited amount of liability, meanwhile limited partners can only be subjected to liability in the amount of their own investment in the partnership.
Other non-conventional investments may include leveraged ETFs, commodity futures, tenant in common investments (TIC), and real estate trusts (REIT).
- Leveraged ETFs – these are funds that track an exchange and magnify gains or losses. They are often sold without proper risk disclosure and utilize high leverage (borrowing of money) in order to magnify gains or recoup losses. As a result, they also magnify the risks and often lead to greater loss.
- Commodity futures – Buying goods often seems appealing and “safe,” but it requires a great deal of speculation around economic, social, political, and climate issues, and therefore, involves a great degree of risk
- TICs and REITs – TICs are often sold for tax benefits and involve real estate. REITs also usually sound like good real estate related investments. TICs and REITs are often sold as alternatives to the market, but are frequently illiquid, speculative, and affected by the overall market and economy. If you notice all your investments are illiquid, your broker may have sold you these investments while being aware that they were risky and unsuitable for you. You need an experienced New York non-conventional investments law firm like Malecki Law to assess your case. All of these types of investments require a lot of due diligence (homework) by the broker of the underlying company’s finances and management before recommending it.