Private placements don't enjoy the same SEC protections of stocks on the NYSE or Nasdaq

Private placements — and related investment scams — are becoming increasingly common ways to dupe unwitting investors, and the Financial Industry Regulatory Authority (FINRA) just issued an alert on the topic to help investors protect their portfolio.

Private placements, which are sometimes also called “non-public offerings,” are funding rounds where a company raises money and distributes shares — but in a private manner, instead of on an actual market.

Although private placements sound exclusive and fancy because of their name, the bottom line is that they are private in the respect that they are not open to public view — and this means any investment you make can happen without watchdogs looking out for your best interest.

The worst kind of private placement investments are billed as sure-thing investments that are exclusive to a small set of lucky investors. But after you fork over the cash, these private placements tie up your capital, provide little to no information on how your “investment” is performing and ultimately leave you feeling like someone has taken the money and ran.

The allure of big profits and theoretically preferential treatment in private placements mean the space is perfect for scams. Consider the case of a private placement fraud a few months ago, where the CEO of a firm called BlackHawk Partners even warned prospective investors of overstated scam risks in the space … and then duped them anyway!

To be clear, private placements in themselves are not illegal. But they do not involve SEC scrutiny like publicly traded shares, and require a much higher burden of research and diligence on the part of the investor … making them a vehicle that is frequently abused by scam artists.

The bottom line is that there are reasons that some investment aren’t public or widely accessible, and those reasons frequently involve the ability to perpetrate investment scams with impunity.

Here’s the FINRA report on private placements:

The Financial Industry Regulatory Authority (FINRA) issued a new investor alert called Private Placements—Evaluate the Risks before Placing Them in Your Portfolio to caution investors that investing in private placements is risky and can tie up their money for a long time. A private placement is an offering of a company’s securities that is not registered with the Securities and Exchange Commission (SEC) and is not offered to the public at large. Many private placements are offered pursuant to Regulation D of the Securities Act of 1933. In general, you must be an “accredited investor” to invest in 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. Given the risks and liquidity issues, investors should carefully assess how private placements fit in with other investments they hold before investing,” said Gerri Walsh, FINRA’s Senior Vice President for Investor Education.

FINRA is advising investors that if they are provided with a private placement memorandum or other offering document, they should carefully review it and make sure that statements by their broker are consistent with it.