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What are Alternative Investments?

Most investments are either traded on public securities exchanges, or, in the case of mutual funds, have daily publicly available pricing for redemptions and purchases. Publicly traded investments add liquidity to an investor’s portfolio, along with allowing for easier regulation of the investments, and, of course, proper pricing of an investment.

However, this is not the case with all investments; some securities do not trade on any public exchanges, and do not have any available guaranteed pricing for redemption purposes. These investments are referred to as “private” or “non-traded” and are often pitched to unsuspecting investors as an alternative way of investing.

Alternative Investments

The Truth About Alternative Investments

Privately traded investments are very difficult to regulate and value. This opens up a Pandora’s box of problems that many unscrupulous brokers utilize as a way of taking advantage of unsophisticated investors. They often entice investors by pitching these investments as the next big thing, or they may guarantee an income yield on the product that is higher than market rates. This often makes investors feel like it’s an incredible opportunity that they won’t want to miss out on.

Because these non-traded securities are not listed on any public exchanges, it is very difficult to ascertain the true value of these securities at any given point. Interested investors might thoroughly believe that a particular private investment is worth the amount they are told; however, in many cases, these products have so many front-end fees and commissions that the investment is actually worth less than what the investor pays per share.

Types of Alternative Investments

There are several different kinds of alternative investments that include:

The significant majority of these products are not suitable for investors due to their associated risk, illiquidity, and extremely high cost-structure; however, they continue to be pushed onto unsuspecting investors because of the excessively high commissions that the selling brokers receive.

Registered vs. Unregistered

Most of these private investments are still registered with the Securities and Exchange Commission. This means that they are still required to provide investors with a prospectus. This is a document detailing the offering of the investment and goes into detail about how the invested funds are to be used. However, some brokers lead investors into believing that just because the issue is registered with the SEC, that it is a regulated investment—which is misleading. The fact that the investment is registered does not increase how well the investment is regulated.

Companies that offer investment pools may file for registration with the SEC as a Regulation D Private Placement. Regulation D creates an exemption for issuers that allows them to sell their securities without a full SEC registration and without a prospectus.

Due to this exemption, there are stricter rules in place for who the investment can actually be sold to. Private placements are only supposed to be sold to what are known as “accredited investors.” This is an investor who either has a net worth of $1 million (not including their main residence) or a consistent annual income of $200,000. This number moves up to $300,000 for a joint income.

When a private placement has been offered to an investor who does not qualify as “accredited,” those managing the offering have violated the terms of their exemption. Brokers will often fill out the subscription agreements of these forms so that the numbers on the forms meet the minimum requirements of accreditation, even if the clients do not qualify.

Taking Advantage Of Investors

Alternative investments are often sold by third-tier independent brokerage firm brokers. They are typically investment pools meant for things like funding real estate projects, providing private mortgages, or representing an interest in a company that is trying to get off the ground—among other things.

Those who manage these companies usually want to hang onto cash infused for as long as they can to pay for operating costs. This is especially true for the ones that take longer than expected to achieve any sort of growth. Because of this, investors looking to liquidate their shares of a privately traded security are typically either not able to redeem the security or are forced to sell the security at a much lower price than the issuer reports.

Investors also may be offered a buy-out from a third-party company that is substantially less than what they believed they had invested in the company. Because of this, these alternative investments should never be recommended to investors who believe they may need to liquidate shares, should the need arise.

These alternative investments are very rarely suitable for investors; however, they are continuously recommended to investors by their stock brokers. This is because brokers receive outrageously high commissions taken straight from the investor’s principal investment. These commissions can be as high as ten percent of the investor’s principal investment, simply for brokering the trade. This ten percent, compounded with other upfront fees associated with these types of investments, can result in up to 17 percent being subtracted from an investor’s principal at the time of the transaction. When an investor’s principal investment is lowered that substantially, it becomes very difficult to see desired returns under anything besides exceptional market conditions.

If You Suffered Losses Due to an Alternative Investment – Contact Oakes & Fosher

Oakes & Fosher dedicates its entire legal practice to helping investors across the nation. If you believe that your securities broker placed you in a highly unsuitable alternative investment, you may be entitled to damages. Contact Oakes & Fosher for a free and private consultation.

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