Different opportunities to invest in private placements may present themselves to wealthy individuals over time. Unless the opportunity comes from someone that you know and trust, and you have the ability to research the opportunity, it is probably something you should avoid.
Private Placements are sometimes complex deals that cost people a lot of money. You should definitely have your guard up if one is pitched to you. In general, the company or partnership seeking the private placement will not have to register with the SEC or report their books accurately on a public record.
They do have to adhere to the guidelines of Regulation D, but this does not offer much protection. You should only consider it if the opportunity comes to you through someone you know and trust, and if you feel that there is a high degree of transparency to the deal.
Once you’ve given your money to the person or entity running the project or company, there is no guarantee that you will ever see it again, no matter what the documents say.
Regulation D does stipulate that if the company is trying to raise over $2 million in one year, they must provide investors with audited financial statements, but if these statements do not exist for a new company, there is very little information to go on.
A court case (Gustafson v. Alloyd) has set the precedent that investors are not likely to be able to sue for “negligent misrepresentation” on the part of the private placement general partners, meaning a lack of due diligence or actually doing what was promised in a competent way, which makes it nearly impossible to recoup lost funds unless you can prove an intent to defraud.
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