Private placement investment? No problem. You’ve got accredited investors who have high net worth, who know the investment game, who are experienced enough to realize they could, in fact, lose money. But the potential profits look tasty and with crowdsourcing, it’s possibly to conveniently do everything online.
Except, there’s a stunningly deep flaw that Jason Zweig at the Wall Street Journal stumbled upon. Apparently, the Form D paperwork that enables the process is not what one might expect.
“For the cost of notarizing a single document—probably $10 or less—you can declare yourself one of the biggest financiers in history,” Zweig wrote, talking about a specific person (you can read the article for all the details) who claimed to have raised $344 billion through four companies since February 2020. “Unlike disclosures for public companies, Reg D disclosures, known as Form D’s, contain only the most basic information, such as the company’s address, the size of the deal, the number of investors and a few other items. The SEC doesn’t regularly review Form Ds, as it does prospectuses for public companies.”
This is such a serious problem that the SEC has a web page devoted to false claims of agency registration. “Fraudsters may try to lure you into investing with them by falsely claiming to be registered with the SEC,” they wrote. “In a recent fraud case brought by the SEC, SEC v Fleet Mutual Wealth, the defendants allegedly promised investors guaranteed returns of 2-3% per week through the use of a high frequency trading strategy, but instead used investors’ money to operate a pyramid scheme. The defendants allegedly recruited investors by misrepresenting that their firm was ‘registered’ or ‘duly registered’ with the SEC and pointing to the firm’s Form D filings to support this misrepresentation.”
There are penalties for misrepresenting SEC filings, but who is going to know until it’s too late if the agency doesn’t check the documents?
According to Zweig’s research—along with work by Elisa Cho and Jim Oberman—the person he referred to “has spent much of the past 20 years in and out of county jails and state prisons in Mississippi and Florida.” Claims of offices at a tony location can’t be verified by the company operating the property.
And there’s much more. Again, worth the read if you’re prepared to lift your chin off the floor.
What makes this more disturbing is the use of technology to promote private placements. Go to a flashy site, provide the requested information, and you might think you’re locked into something good.
More like tied to the mast of a sinking ship.
You always have to do the research and assuming that anyone might be trying to scam you.