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TheStreet Open House

This is Why Wall Street is So Last Century

By Hal M. Bundrick

NEW YORK ( MainStreet) -- Wall Street is passé. The real money is in that new app startup you just found out about -- or in a biotech breakthrough you really believe in. And with new crowdfunding investments set to explode, big upside deals will seem to be everywhere. Real estate, oil and gas, new media companies. These non-public investments are the kinds of opportunities more investors are seeking these days, particularly the young and wealthy, as they look beyond traditional public stock market offerings and choose to open the investment door marked "Private."

A recent survey conducted by iCrowd revealed that nearly half (49%) of high net worth investors under the age of 30 are currently invested in private placements. One-in-five wealthy investors between 45-60 years of age are, too.

But are they fully aware of the risks?

The Financial Industry Regulatory Authority (FINRA) has issued a new investor alert to remind consumers that private placements are risky and "can tie up their money for a long time."

While choosing to invest in a company not listed on a public stock exchange or registered with the Securities and Exchange Commission (SEC) may seem like an opportunity to make a profit the general public can't, there are barriers to entry. First, you need a fat wallet.

In most cases, but not all, you must be what is defined as an "accredited investor" to buy into a private placement.

"Investors should understand that many private placement securities are issued by companies that are not required to file financial reports, and investors may have problems finding out how the company is doing," says Gerri Walsh, FINRA's Senior Vice President for Investor Education. "Given the risks and liquidity issues, investors should carefully assess how private placements fit in with other investments they hold before investing."

The details on these deals are usually listed in a private placement memorandum or other offering documents - sometimes laced with inaccuracies and omissions, according to FINRA.

For investors looking into a private stock deal, FINRA says to consider the following:

  • Find out as much as you can about the company's business and understand how and when you are allowed to liquidate your private placement securities. Such "restricted" stocks are often hard, if not impossible, to sell.
  • Ask your broker what information he or she was able to gather about the issuing company and the private placement.
  • Be extremely wary if you receive paperwork to sign about a private placement without having a discussion with your broker first about if such an investment is right for you.
  • And use caution when considering private placements you hear about through spam emails or cold calling. They are very often fraudulent.

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