Beware of private placements

by | Mar 28, 2002 | Archives

Many investors think that private placements offer especially good deals. In some instances the reverse can be true!

Dear International Friend,

Recently a reader wrote asking about a private placement of shares in an up and coming company (so they thought). “Are private placements always the best way to go', he asked. “Beware,” was my reply, “especially in today's dodgy economy”. Larry Grossman's comments below give a greater depth to my warning.

“Dear reader, Gary has described a private placement to you correctly. Here is the definition from a site I refer people to on a regular basis, .

I have also included a very comprehensive article written by an attorney with a description of the regulations governing private placements. It is lengthy and very technical but may be of use depending upon your level of interest. If not, you may want to simply scan it.

My answer-

A Private Placement is a method for a corporation to raise funds. That is all, pure and simple. It does not mean the deal is any better or any worse. The nature of the deal is described in something called the private placement memorandum. A private placement can be in the form of a bond or note, (you loan the company money), or in the form of privately held stock, that cannot immediately be sold, (you are a partial owner of the company). The inherent risk has everything to do with the company and their financial position and what they are backing the offering with. All of this is described in the private placement memorandum I previously describe. One other important point is that most private placement are only available to “accredited investors” a term defined by the SEC and driven by level of sophistication and income/net worth.

Please let me know if you have any other questions, or if you would like I would be happy to review the offering as a courtesy to you as a reader of Gary Scott.”

Larry Grossman will join me as a speaker at “Jyske bank's upcoming international investment seminar. We hope to see you there!

Until next message, good global investing!