Risky and Inappropriate Investments

Recently, a client withdrew several thousand dollars from his retirement account.  He was intending to "invest" that money in a nationally-advertised internet-based advertising business.  He had previously made a modest investment there that was paying him back so he figured he would double down.  As luck would have it, the FBI and SEC shut down the business as it was a Ponzi scheme.  Fortunately for my client that withdrawn retirement money never made it there and his overall losses were minimized.  Many times, things advertised as "opportunities" are anything but.

But outside of such scurrilous schemes, there is a new threat to the common investor.

On Aug. 29, the Securities and Exchange Commission proposed a rule permitting issuers to promote private offerings to the general investing public for the first time.  Under the Dodd-Frank financial-overhaul law of 2010 and the JOBS Act of 2012, Congress allowed companies to market their private securities to anyone they care to pitch to.

The end result: rules that make some of the biggest changes to the investment world in more than a quarter of a century.

The new regulations will ease capital-raising for many legitimate companies. But they also could subject unwary and vulnerable investors to deals that offer limited financial disclosures and even less liquidity.

Once the rule goes into effect, anyone can be pitched on stakes in hedge funds and other exclusive investment pools, as well as oil-and-gas partnerships, real-estate securities and a host of other offerings that long have been sold privately under an exemption to the federal securities laws known as Regulation D.

So-called Reg D securities aren't listed on an exchange and rarely trade, and their issuers don't have to file financial statements publicly with the SEC.

Until now, companies generally could market private securities only to wealthy investors with whom they (or their representatives like stockbrokers and the like) had "pre-existing relationships." The new rule enables private securities to be marketed anywhere, by any means.

You could see ads on the Shopping Channel or the checkout screen at your neighborhood nail salon.

Under the new rule, in order to buy into a publicly marketed private offering you must verify that you have at least $1 million in net worth, excluding the value of your home. The SEC is leaving it mostly up to companies and brokers to determine how they will verify the net worth of prospective investors.

If you are approached to invest in a private deal, get a second opinion.

Source:  Jason Zweig, Wall Street Journal

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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