Investors complaints, however, continue to rise, say lawyers. Reg-D offerings are becoming increasingly attractive to small and independent broker dealers, which can earn between commissions between 7% and 10%.
Lawyers who represent investors are skeptical that eliminating the value of a person's primary residence from the calculation of net worth will achieve much. The premise that an investor is sophisticated if he or she has $1 million in assets is flawed, says Nicholas Thomas, a securities lawyer in Vero Beach, Fla. "There are a lot of ways to make a million-such as buying a stock 30 years ago that quadrupled," he says. "That doesn't make them savvy investors."
Thomas represents an investor who was recently awarded $400,000 from a brokerage in a securities arbitration case involving private placement notes offered by Medical Provider Funding Corp. VI, the subject of a 2009 civil fraud complaint by the Securities and Exchange Commission. The brokerage, Peak Securities Corp. in Largo, Fla., is no longer Finra-registered. Thomas says he will pursue collections.
Joseph Wallin, a Seattle-based lawyer who represents start-up companies, says there are competing interests. Providing start-ups and other small businesses with access to capital benefits the economy by helping to produce jobs. Furthermore, the vast majority of private placements are sold to issuers' personal contacts, since marketing the securities is against SEC rules.
Those investors and others could benefit from a few simple rules of thumb when deciding whether to invest in private placements, he says.
"These are high-risk deals. You should only put a small portion of portfolio in these things," says Wallin. "These investments shouldn't even be made if you're not willing to let the money go."
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