Private Offerings of Securities

Private offerings, which are also known as private placements, play a crucial role in the capital markets. Every year, hundreds of billions of dollars are raised through private securities offerings. Unfortunately, private offerings have repeatedly served as a source of immense concern for securities industry regulators. All too frequently, large scale abuses have accompanied private offerings.

SEC Regulation D (“Reg D”) has traditionally served as the vehicle through which private offerings take place. Typically, a private placement memorandum (“PPM”) is prepared on behalf of the issuer of the underlying securities. In theory, the attributes and characteristics of the securities will be described in the PPM. Unfortunately, the descriptions can be highly deficient – they may even be accompanied by blatant falsities and horrendous material omissions.

When brokerage firm personnel distribute misleading offering materials in connection with a private placement, they will often seek to defend their actions by claiming that they were “duped.” In many instances, that assertion will not be entitled to any weight. Framed in concise terms, brokerage firms are prohibited from recommending the purchase of a security unless they have performed a reasonable investigation as to the true attributes of that investment product. Although the depth of the investigation that is to be conducted depends on a variety of circumstances, it is well-recognized that a more thorough investigation is required with respect to small, relatively young companies. And, if any “red flags” arise during the course of an inquiry, an obligation to “dig deeper” is triggered. As a general rule, a brokerage firm may not rely blindly on the issuer for information, nor may it rely on information provided by the issuer’s attorney in lieu of conducting its own investigation.