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January 9, 2012

SEC Adopts Regulations to Preclude the Sale of Private Placements to Small Investors

As repeatedly reported here in the California Securities Fraud Lawyer Blog, we have seen an exponential growth in investor complaints involving the sale of private placements. For those of you unacquainted with the term "private placement," click here.

swim at own risk.jpgIn a nutshell, private placements are illiquid non-publicly traded investments that are exempt from registration requirements under the Securities Exchange Act. For this reason, only wealthy and sophisticated investors, referred to as "accredited investors," are allowed to invest in them. In order to qualify as an accredited investor, an individual must have a net worth of $1 million or more. However, this does not mean that it is fair game for stockbrokers and investment advisors to sell private placements to anyone with a paper net worth of $1 million. See related blog posting: Even for Accredited Investors, Stockbroker Recommendations to Buy Private Placements Are Subject to the Suitability Rule.

In an effort to protect smaller investors whose only significant asset is their home, the Securities and Exchange Commission ("SEC") recently took steps to limit Regulation D of the Securities Exchange Act of 1933 to exclude an investor's primary residence from the $1 million net worth calculation. Although the rule became effective February 27, 2012, the net worth prohibition actually took effect back in July 2010 when President Obama signed off on the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2009. See blog post: Investor Home Equity to be Excluded from $1 Million Minimum Net-Worth Requirement for Accredited Investors

The Bottom Line

We recommend extreme caution to anyone contemplating an investment in a private placement that is limited to accredited investors. Don't be fooled by your financial professional's sales pitch. No matter how you slice it, private placements are illiquid and risky investments. As stated in the fine print: These investments are only appropriate if you are willing to lose your entire investment. Still not convinced? I've got a backlog of cases where clients wrongfully assumed that they could get out of their investment anytime they wanted. They are still waiting.

Related Blog Postings:

May 24, 2010

IMH Secured Loan Fund IPO: Management Wants to Come Out of Hibernation

My securities law firm represents several IMH investors, some of them unaccredited investors who never should have been allowed to purchase the fund in the first place. A large percentage of these investors purchased the IMH Secured Loan Fund from brokers registered with Independent Financial Group. My clients want their money back as soon as possible. The quickest way to accomplish this was to cash out at the price of $1,000 per unit as part of the tender offer from MacKenzie Patterson Fuller (MPF) which expired on April 26, 2010. Admittedly, the $1,000 per unit price is a steep discount from the $4,406.86 per unit book value reported by IMH in the Form 10-K recently filed with the SEC for the period ending December 31, 2009. However, investors currently have no way to sell or redeem their units at this or any other price. The next opportunity for investors to sell their units may be as part of an initial public offering (IPO)--assuming the company's restructuring plan is approved by investors and the company can pull off a successful IPO under what may prove to be very challenging market conditions. IMH management anticipates that the initial IPO price will be set at a discount to the book value per share price.

There is at least one group lead by LGM Capital Partners LLC that is opposing IMH's plan and advising members to vote against the reorganization. On May 18, 2010, "The Committee to Protect IMH Secured Loan Fund" filed a statement with the SEC advising members to reject management's restructuring plan. Additional information was filed by the committee on May 20, 2010. Click here to download the committee's "talking points" which was intended for use by broker dealers when advising customers about IMH management's proposal.

Investors have until 5. p.m. on June 14, 2010, to cast their vote on management's proposal to restructure the company. If management's plan is approved, investors will be allowed to exchange one ownership unit for 220.3419 shares of Class B or Class C common stock. When investors cast their vote, they must elect whether to receive Class B stock, Class C stock, or some combination of the two. Those who do not make an election will automatically receive Class B common stock in exchange for their membership units.

Even investors who plan to vote against the restructuring plan
should make an election, just in case the plan is approved.

Many investors are understandably confused about the different classes of shares. Investors who elect to receive Class B shares will receive a fixed percentage of series B-1, B-2 and B-3 stock. Class B shares cannot be sold immediately after the IPO. Series B-1 shares can be sold 6 months after the IPO. Series B-2 shares can be sold 9 months after the IPO, while Series B-3 shares may not be sold until 12 months after the IPO. Class C shares, on the other hand, can be sold immediately after the IPO. Investors who want to liquidate their investment at the next available opportunity may want to convert some or all of their units into Class C shares, rather than Class B shares. Investors who can afford to hold onto their investment long-term and are optimistic about the company's prospects may want to choose Class B shares.

Below is a chart that was presented to investors during a video produced by IMH's management in support of the restructuring plan.

Click on image to enlarge.

manager's video chart1.JPG.

Click here for more blog postings about IMH Secured Loan Fund.

March 22, 2010

Massachusetts Securities Regulators Subpoena Six Brokers Over Sale of Medical Capital Holdings and Provident Royalties

mass-quarter.jpgThe Bay State has stepped up its investigation into the fraudulent sale of private placements by securities brokers. Today, the Massachusetts Securities Division announced that it issued 6 subpoenas to National Securities; QA3 Financial; CapWest Securities; Independent Financial Group; Investors Capital; and Centaurus Financial seeking information related to the sale of Medical Capital Holdings Inc. and Provident Royalties. Earlier this year, the Commonwealth of Massachusetts filed a securities fraud lawsuit against Securities America charging the firm with misleading investors in the sale of Medical Capital Notes. [See Massachusetts Regulators Charge Securities America With Securities Fraud]

Although the Commonwealth of Massachusetts is primarily concerned with the sale of Provident Royalties and Medical Capital Notes to residents of that state, the fraudulent sale of risky private placements has affected thousands of investors across the nation and is now the subject of intense scrutiny. Several of the brokers that were subpoenaed by Massachusetts have been subjected to an influx of customer arbitration claims and securities class action lawsuits. [See: Medical Capital Class Action or Arbitration: Investors Should Consider Their Options and related blog postings discussed therein.]

March 3, 2010

Even for Accredited Investors, Stockbroker Recommendations to Buy Private Placements Are Subject to the Suitability Rule

In my California-based securities law practice, most of my clients that own a home qualify as "accredited investors" within the meaning of Regulation D which exempts private placements from federal securities registration requirements. Rule 501 of the Securities Act of 1933 defines an accredited investor as any person with a net worth (or joint net worth with a spouse) in excess of $1,000,000 at the time of purchase.

danger sign.jpgFinancial advisors or stockbrokers who sell private placements are subject to the rules and standards promulgated by the Financial Industry Regulatory Authority (FINRA). According to FINRA, stockbrokers who act as selling agents for private placements are required to conduct a due diligence investigation of the offering so that they understand the nature of the investment and its risks. Also, before recommending a private placement to a particular customer, the stockbroker must perform a suitability analysis by examining the customer's overall financial situation and investment objectives. Because a home can represent an investor's largest asset, net worth alone should never be used to determine whether an investment is suitable. A customer's status as an accredited investor does not release a stockbroker from the suitability requirements.

Recently, there has been a surge in investor complaints involving private placements that were sold by broker-dealers who were acting as selling agents. Private placements that are creating a lot of investor complaints include: Medical Capital, IMH Secured Loan Fund, Provident Asset Management, Striker Petroleum and DBSI. Some of the broker dealers who actively sold one or more of these private placements are Securities America, QA3 Financial, National Securities, CapWest, Independent Financial Group, just to name a few. Please contact us if you have any questions about unsuitable private placements.

Related Blog Posts:

Investor Home Equity to be Excluded from $1 Million Minimum Net-Worth Requirement for Accredited Investors

It's Time to Change the Accredited Investor Rule for Private Placements