Securities traded on the exchanges must be registered with the U.S. Securities Exchange Commission (SEC). Registration will subject the company to SEC regulations and provides purchasers of the securities with certain protections.
Unregistered securities are not necessarily illegal, but their sale is prohibited except to qualified buyers or in specific circumstances. Unfortunately, many Ponzi schemes are centered around investments in unregistered securities.
Silver Law Group represents people who have been scammed by fraudsters offering unregistered securities and investments in Ponzi schemes. If you have been a victim of this type of fraud, our aggressive Ponzi scheme attorneys can help you pursue compensation to recoup your investment.
Whenever a company seeks to have its shares publicly traded, the company must register the securities. Registration requires the company to file specific documents with the SEC before its initial public offering (IPO).
For example, private companies sometimes issue unregistered securities to their executives or employees as part of a compensation package. This is legal, but the recipients are restrained from selling the shares to people outside the company.
Start-ups can raise capital by offering unregistered securities through a Regulation A offering. Although the company does not have to complete the comprehensive documentation necessary to be registered, it must provide an “offering circular” to investors with required disclosures. The SEC must qualify the offering circular, but qualification is not an endorsement of the accuracy of the circular.
Smaller companies hoping to raise capital can sell unregistered securities in a Regulation D offering, also called a private offering. They still must provide substantial information to the SEC before offering the securities, but the process is less time-consuming and burdensome than the process for registering securities for an IPO or a Regulation A offering.
Reg D offerings have been the subject of tremendous abuse because there are many exceptions to how these securities can be sold.
In most cases, the SEC restricts the sale of unregistered securities to qualified buyers, also called accredited investors. These are individuals whose income and wealth meet certain thresholds.
An accredited investor must have an income of at least $200,000 per year for the last two years and reasonably expect to earn a similar amount in the current year. If the investor is married, the annual income threshold is $300,000. They must also have a net worth of at least $1,000,000, excluding their primary residence.
In some cases, a company offering a private placement can also make the investment available to sophisticated investors. There is no legal definition of a sophisticated investor, but a person may be one if they have a high net worth and considerable experience with a variety of investment vehicles.
Ponzi schemers can use the cachet of unregistered securities to induce investors. They may promise exceptional returns with little risk, but the investment strategy or company’s operations are often so opaque or complex as to be incomprehensible.
Unregistered securities or private offerings are attractive to scammers because the disclosure requirements are less onerous than registered securities. Some scammers issue unregistered securities that are not compliant with Rule A or Rule D regulations. In many cases, the unregistered securities are sold by an unlicensed seller or unregistered investment firm.
Wealthy and/or sophisticated investors often have opportunities to invest in unregistered securities. Although these investments are often legitimate and may represent an excellent opportunity, Ponzi schemers often make use of unregistered securities to steal money.
If you believe you were the victim of an unregistered securities scam, contact the securities fraud lawyers at Silver Law Group to discuss your litigation options.
