Private Placement Lawyer: Reg D, Non-Traded REIT, BDC and Alternative Investment Losses

What Is a Reg D Private Placement?

A private placement is a sale of securities that is not registered with the Securities and Exchange Commission ("SEC"). Most rely on Regulation D ("Reg D"), usually Rule 506, which lets a company raise an unlimited amount of money, mostly from "accredited investors." The company does not have to give you the disclosure a public company would, and its offering memorandum is typically not reviewed by any regulator.

The SEC warns that private placements are highly illiquid, that you may need to hold them indefinitely, and that you should be able to afford a total loss. The company files a short notice called a Form D, but that is not SEC approval.

Private placements are big business. According to SEC analysis cited by FINRA, 69% of new capital raised in 2019, about $2.7 trillion, came through unregistered offerings. In 2024, state securities regulators reported 152 investigations and 47 enforcement actions involving Rule 506(b) private placements, according to the North American Securities Administrators Association ("NASAA").

Shares of well-known private companies, often sold as "pre-IPO" deals through special purpose vehicles, are a fast-growing kind of private placement. See pre-IPO and private company share claims.

Non-Traded REITs, BDCs, Private Credit, Oil and Gas Programs and Interval Funds

Some are private placements; others are registered with the SEC but not listed on an exchange. They share the same problems: no market price, limited ways out and high costs.

• Non-traded REITs. Real estate companies that are not listed on an exchange. A listing or liquidation might not come until more than 10 years after you invest. Early redemption programs are typically limited, may require a discount, and can be stopped without notice.

• Delaware Statutory Trusts ("DSTs"). Private real estate offerings often sold to investors completing a 1031 exchange. See DST and 1031 exchange claims.

• Non-traded BDCs and private credit. BDCs invest in small and mid-sized private companies, and some focus on private credit, lending directly to businesses. Non-traded BDC shares can generally be sold only when the BDC offers to buy them back, typically monthly or quarterly. Private credit is also sold through feeder funds, which can carry several layers of fees and lock-ups of up to 10 years or longer.

• Oil and gas programs. Drilling ventures are often sold as private offerings. The SEC has warned that a promoter may own the drilling company and get paid even if the well comes up dry.

• Interval funds. Funds that offer to buy back shares only every three, six or twelve months, and then only 5% to 25% of all shares. If too many investors want out, you may get back only part of what you asked for.

The Hidden Cost: Commissions, Fees and Values Set by the Sponsor

Alternative investments can cost far more than they appear to. The SEC says non-traded REITs typically charge 10% to 15% of the investment up front for commissions and other offering costs, leaving less of your money to invest, with ongoing fees on top. BDCs and interval funds can also charge more than other funds.

The steady payout can mislead too. Non-traded REITs may pay distributions from borrowing or from the money investors put in, which reduces the value of your shares. With no market price, the value on your statement rests on periodic appraisals that may not be accurate or timely. When a cheaper, simpler investment you could sell any day would have done the same job, that matters.

Which Rules Apply?

Under the SEC's Regulation Best Interest ("Reg BI"), a brokerage firm and its financial advisors must act in your best interest when they recommend an investment, and may not put their own interests ahead of yours. That includes understanding the product's risks, rewards and costs, and having a reasonable basis to believe it is in your best interest given your age, goals, finances and risk tolerance. The SEC has made clear that cost must always be considered, and that a firm generally should consider reasonably available alternatives. For private placements, SEC staff say firms generally should apply heightened scrutiny and ask whether lower-risk or less complex options could meet the same goals. Reg BI protects accredited investors too.

Brokerage firms must also reasonably investigate any private placement they recommend. In Regulatory Notice 23-08, FINRA reminded firms that this means, at a minimum, looking into the issuer and its management, business prospects and assets, the claims being made and how the money will be used. Firms should also consider the issuer's regulatory and litigation history, payments to the sponsor's affiliates and cherry-picked past performance, and not rely solely on what the issuer says. Under FINRA Rule 5123, a firm that sells a private placement generally must file the offering documents and any sales materials with FINRA within 15 calendar days of the first sale. Firms must also supervise their financial advisors and act on red flags.

Common Claims in Private Placement Cases

• Reg BI violations: an illiquid, high-cost investment that was not in your best interest given your age, goals, need for access to your money, or its cost compared with reasonably available alternatives.

• Failure to investigate: a firm that sold an offering without reasonably investigating the sponsor and its claims, or that ignored red flags.

• Misrepresentation and omission: an investment described as "safe," "guaranteed" or easy to cash out, or one whose fees and lock-up were never explained. See fraud and misrepresentation.

• Overconcentration: too much of your savings in one or several investments you cannot sell.

• Breach of fiduciary duty: an advisor who put its own compensation ahead of your interests. See breach of fiduciary duty.

• Failure to supervise: a firm that let concentration in these investments go unchecked.

When many investors bought the same offering through the same financial advisor or firm, see group cases. Past examples include GPB Capital and GWG Holdings' L Bonds.

Warning Signs in Your Account

• The investment was pitched as an "exclusive" or once-in-a-lifetime opportunity.

• No one can tell you what the investment costs you each year, all in.

• The value on your statement comes only from the sponsor, and you have never seen a market price.

• Your request to cash out was denied, prorated or suspended.

• Distributions were cut, or you learned they were paid from investor money or borrowing.

• You are retired or nearing retirement, and a large share of your 401(k) and IRA savings went into investments you cannot sell. See poor retirement advice and senior fraud and elder abuse.

How Brokerage Firms Defend These Cases

Daren spent years on the defense side, so he knows the playbook:

• "The risks were in the offering memorandum." Written disclosures matter, but they do not automatically defeat a claim. FINRA has cited decisions holding that written disclosures in an offering memorandum do not excuse misleading oral statements.

• "The sponsor failed, not us." Even if the sponsor went bankrupt, the question is whether the firm reasonably investigated the offering, and whether it should have been recommended to you at all.

Documents That Help

• The private placement memorandum or prospectus, subscription agreement and any sales materials

• Account statements and confirmations, including any valuation notices

• Redemption, repurchase or tender offer letters

• Account opening forms and risk profiles, including any accredited investor questionnaire

• Emails, texts and your notes of calls with your financial advisor

Deadlines

Under FINRA Rule 12206, a claim cannot be brought in FINRA arbitration once six years have passed since the event that gave rise to it. Other legal deadlines can be much shorter. If you suspect a problem, talk to a lawyer promptly.

Why Investors Choose Daren A. Luma

Daren has 26 years of experience in litigation, arbitration and regulatory matters involving the financial industry. He worked for 10 years at one of the largest defense law firms in the world, representing financial firms in litigation, arbitration and regulatory matters, and before that served as in-house counsel at one of the largest brokerage firms. He has seen how brokerage firms review customer complaints and build their defenses, and he now uses that experience for investors. Since founding the firm in 2018, he has represented over 400 clients and recovered over $130mm for investment victims. Prior results do not guarantee a similar outcome. He personally handles each case from start to finish.

• Strong Reputation — Over 26 years of practice specialized in the financial industry. I’ve achieved successful results in a wide variety of legal forums. Since 2018, I have represented over 400 investment victims and successfully recovered over $130 million for them.

• Individualized Attention — At my firm, unlike some securities litigation firms, you can trust that your case will be handled from start to finish by me instead of being handed off to a lower-level associate without the requisite knowledge or experience.

• Strategic Counsel — With experience as in-house counsel within a large brokerage firm and 10 years with one of the largest (defense) law firms in the world, I offer clients a well-rounded perspective on their investment loss issue. From there, my firm develops a comprehensive plan to achieve the best possible outcome.

More on Alternative Investments and Complex Products

Private placements are one of several alternative investments we handle. See complex investment products for structured notes, annuities and more, or read about structured note claims, RILA and annuity claims, DST and 1031 exchange claims, pre-IPO share claims and non-traded BDC redemption limits.