Private Security Scams


By:  Jennifer Bachelor


The sale of private securities has increased significantly over the last decade.  Legitimate private securities may provide increased portfolio diversification and returns. Unfortunately, this has also given rise to fraudulent security schemes.  Investors need to be aware, so they do not fall victim to such scams.

Private security offerings do not have to register with the Securities Exchange Commission if they meet minimum guidelines.  They are not held to the same scrutiny as public offerings.  Advisors and brokers can sell private, unregistered securities to clients with a net worth of at least $1 million or income of $200,000 annually, but agents on the outside of the financial industry are not as well supervised and held to the same standards.  It is difficult to identify private security scams because the agents that sell them (insurance agents or former stockbrokers, for example) are not under the supervision of the Financial Industry Regulatory Authority Inc.

Scams go unnoticed until an investor files a complaint with a regulator and an investigation commences.

Additionally, in the past, private securities were sold over the phone or via seminars primarily, but the internet and social media have given scam artists a platform to heavily advertise their investment scams and promises of exciting investment returns to anyone willing to click.  They prey upon senior citizens, inexperienced investors, and those without financial advisors.  Sadly, these are often people who cannot afford to lose their initial investment.

Unscrupulous registered brokers can also sell fraudulent private securities using a type of transaction called “selling away”.  This involves the representative requesting the client to move money from their brokerage account (TD Ameritrade, for example) to their bank account. Then the investment is made from the client’s bank account.  This makes it difficult for the broker-dealer firm to supervise.

Here at Homrich Berg, we may alert you to opportunities in private funds occasionally.  Those opportunities are reviewed rigorously by our investment department, and we do not receive any commissions on any sales.  The investment management fees are the same as if you were invested in a stock, bond, mutual fund, etc.  The investment purchase is made directly from your brokerage account.  You may hear about private security offerings from your friends.  Be sure to run them past your client manager for review before investing.

The sale of private securities will likely continue to grow.  Legitimate private securities provide wealthy investors with additional diversification and investment opportunity.  Just be aware that not all private security offerings are legitimate.

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Homrich Berg is a national independent wealth management firm that provides fiduciary, fee-only investment management and financial planning services, serving as the leader of the financial team for our clients.