Private placements are becoming increasingly popular with many high-net-worth investors, and for several good reasons:

  • With recent spikes in market volatility and concerns that we may be nearing the end of a long-running bull market, private placements can provide important diversification in a portfolio with investments that aren’t necessarily correlated to the stock market
  • Preservation of wealth is always front-of-mind for investors who have business-owned real estate, and certain private placements like Reg. D 1031 exchanges can provide important tax-deferral benefits for these individuals and their heirs

What is a private placement?

By definition (according to FINRA, an independent regulator of securities firms doing business in the United States) a private placement is defined as:

A private placement is an offering of unregistered securities to a limited pool of investors. In a private placement, a company sells shares of stock in the company or other interest in the company, such as warrants or bonds, in exchange for cash.

Private placements are regulated by a series of U.S. Securities and Exchange Commission rules known as Regulation D, or Reg D. Under Reg D, companies can issue varying amounts of securities based on the type of investor they are selling them to—accredited or non-accredited investors—without registering those securities with the SEC.

Who is an accredited investor?

Again, according to FINRA’s definition:

An accredited investor is a person—or a married couple—with a net worth of at least $1 million (excluding the value of the primary residence), or an individual that earned an income of at least $200,000, or more than a combined $300,000, in the case of married couples, for each of the last two years, and reasonably expects the same for the current year.

If you meet these requirements and are interested in taking a closer look at private placements, there are several things you’ll want to consider in determining if a specific investment is right for you. We call these the ABC’s of private placement research:

1. Ask

Ask your financial professional:

  • What information he has reviewed regarding the issuing company and the specific private placement being considered
  • If he has a comprehensive understanding of all the risk factors that should be considered such as financial strength and history of the issuer, competitive landscape, use of leverage and any other economic issue that could influence risk
  • How this investment aligns with your existing portfolio and why its addition might prove to be beneficial to your overall financial plan

2. Beware

Beware of:

  • Any inconsistencies between what you have read in the private placement memorandum and other offering documents, and what you may be hearing from your investment professional
  • Private placement offerings you hear about through suspect emails or cold calling. From our experience, these are often fraudulent. All legitimate investment professionals are required to be properly licensed with governing bodies like FINRA, the SEC and state securities regulators, depending on the type of business the firm is engaged with

3. Check

Check:

  • The offering documents and all related sales material to make sure they are understandable, detailed and balanced. If you don’t understand something, consult with your investment professional
  • Form D of the issuing company (if available on the SEC’s EDGAR database) which provides information on the company’s executives, their experience and other relevant information
  • The distribution source and schedule for real state private placements (like 1031 Exchanges and Delaware Statutory Trusts) to understand if the issuing company’s income can cover projected distributions or if potential distributions will be made from proceeds of sales or additional shares offered

If you follow these general guidelines when evaluating private placements, we believe you will be much better equipped to make an informed decision on the investment that is best suited to your financial goals and objectives.

As mentioned earlier, there are numerous reasons why private placements continue to experience a high degree of investor interest. Do your homework and you might just find a private placement has a home in your portfolio.

If you have any questions about this article, please contact our team. In the meantime, feel free to browse our property listings here.

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This is for informational purposed only and does not constitute an offer to buy or sell any securitized real estate investments.There are risks associated with investing in Delaware Statutory Trust (DST) and real estate investment properties including, but not limited to, loss of entire principal, declining market value, tenant vacancies and illiquidity. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated.  Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This information is not meant to be interpreted as tax or legal advice.  Please speak with your legal and tax advisors for guidance regarding your particular situation.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA). Fortitude Investment Group, LLC is independent of CIS, CAM and CIA.

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