FINRA Issues Risk Alert For Rule 506 Private Placements

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On September 17, 2013, The Financial Industry Regulatory Authority (“FINRA”) issued an investor alert concerning Rule 506 private placement offerings to caution investors about the risks involved in private placement offerings.  FINRA cautions investors that Rule 506 private placements are risky and illiquid investments that can tie up their money for a long time.

A private placement is an offering of a company’s securities that is not registered with the Securities and Exchange Commission (the “SEC”) and is not offered to the public at large. Rule 506(c) which becomes effective nextweek  fundamentally changes the private placement offering process by allowing issuers to solicit if certain conditions are met.  Most private placements are offered pursuant to Regulation D of the Securities Act of 1933.

Rule 506 private placements under Regulation D currently allow companies to sell to up to 35 non-accredited investors and an unlimited number of accredited investors if certain conditions are met.  According to the Securities and Exchange Commission (the “SEC”) Rule 506 is the relied upon by issuers more than any other exemption from registration. Recently approved Rule 506(c) fundamentally changes the way unregistered offerings may be conducted.  While the rule imposes stringent requirements, these requirements are manageable for issuers putting effective  compliance strategies into place.

Effective on September 23, 2013, issuers will  be able to use general solicitation and advertising in Rule 506 private placements made to accredited investors, making it easier for issuers to raise capital and obtain the necessary shareholder base for their going public transaction.  Private placement offerings are a cost effective and relatively quick way for private companies to raise capital prior to their going public transactions but many are concerned new Rule 506(c) will increase fraud in unregistered securities offerings.

FINRA appears to be preparing investors for the increase in fraudulent offerings that many anticipate from Rule 506(c).

Gerri Walsh, FINRA’s Senior Vice President for Investor Education, stated, “Investors should understand that many private placement securities are issued by companies that are not required to file financial reports, and investors may have problems finding out how the company is doing.  Given the risks and liquidity issues, investors should carefully assess how private placements fit in with other investments they hold before investing.”

FINRA is advising investors that if they are provided with a private placement memorandum or other offering document, they should carefully review it and make sure that statements by their broker are consistent with the information contained within the private placement memorandum.  FINRA provided investors with a series of tips to help determine if a private placement is right for them, including the following.

♦ Find out as much as you can about the company’s business and understand how and when you might liquidate your private placement securities.

♦ Ask your broker what information he or she was able to review about the issuing company and this private placement.

♦ Be extremely wary if you receive paperwork to sign about a private placement without having a personalized discussion with your broker about why such an investment is right for you.

♦ Be extremely wary of private placements you hear about through spam emails or cold calling.  They are very often fraudulent.

For further information about SEC trading suspensions, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202N, Boca Raton, Florida, (561) 416-8956, [email protected] or visit  This memorandum is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship.  For more information concerning the rules and regulations affecting the use of Rule 144, Form 8K, FINRA Rule 6490, Rule 506 private placement offerings, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration on Form S-1 and Form 10, Pink Sheet listing, OTCBB and OTCMarkets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, go public direct transactions and direct public offerings please contact Hamilton & Associates at (561) 416-8956 or [email protected].  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
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