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Private Placement Investing & Wealth Building

Monday, November 7th, 2011 and is filed under Products & Investments

Investment risk is a touchy subject for a lot of women investors because, for the most part, we tend to take a more conservative approach to making financial decisions than men. However, sometimes it may make sense to be a bit more aggressive when it comes to investing. Taking calculated, well-researched risks can lead to higher rewards.  Investing for portfolio growth is no exception –– especially when it comes to wealth building strategies.

For accredited, high net worth women investors, there’s a private world of investment options out there for those willing to take on more risk in order to reap greater potential rewards. It’s the world of private placement investing.

Private placements provide qualified investors the opportunity to purchase financial shares (stocks, bonds, or other instruments) in limited partnerships, limited liability companies, limited liability partnerships, and/or C-corporations. Unlike an IPO, in which a company’s initial shares are sold to the general public, a typical private placement is offered only to a limited number of institutional investors, accredited individuals, and entities that meet certain eligibility requirements. The company that is offering the private placement must issue a Private Placement Memorandum, a legal document in which the company formally discloses critical information that investors need to make a fully informed decision.  Although they are classified as securities, private placements are exempt from registration with the Securities and Exchange Commission (SEC). As long as the company meets certain requirements, it does not have to issue public disclosures. 

A private placement offers a company a fairly efficient way to infuse capital into its operations more quickly and less expensively than a public offering. Companies use private placements to raise equity or debt to either capitalize on specific market opportunities or to support operational expenses (research and development, marketing, etc.) needed to drive overall growth. 

Simply put, a private placement is a bridge that brings private capital and privately owned business enterprises (for the most part) together. 

A private placement provides investors an avenue into alternative investing, which allows them to diversify their portfolios outside of traditional market-driven investments. This, in turn, may lead to better overall performance. In return for their capital investment, investors may benefit from the opportunity to participate in the company’s long-term growth potential. Oftentimes, investors enjoy favorable, preferred rates of return on top of the eventual return of invested capital as the company successfully executes its proposed business plan. 

As part of a well-diversified investment portfolio, a calculated private placement investment has the potential to build wealth if all goes according to plan. However, it is important to be 100% clear that investing in a private placement is risky. Here are some things to keep in mind when considering a private placement investment.

Understand exactly what you are getting into. Read every word of the Private Placement Memorandum. Pay particular attention to the risk disclosures, the managers’ experience and/or prior track record, and the proposed business plan. Learn about the industry you will be investing in and get a feel for market opportunity. Talk with your CPA and/or tax attorney so that you understand all tax implications. Private placement investing success is driven by your ability to complete a thorough evaluation of the opportunity through independent due diligence.

Get to know who will be managing the company and ask a lot of questions. Success is 100% dependent on the managers’ ability to successfully execute its business plan to generate income and/or growth potential. Contact your state securities regulator to see if the issuer, brokerage or person selling the security is licensed to do business in your state. This is also where you can check to see if there is a record of problems. Use FINRA’s BrokerCheck (www.finra.org/brokercheck) to get more information about the disciplinary record of any FINRA-registered broker or brokerage firm.

Be prepared to stick with it for the long haul. Private placements are illiquid investments. In most cases, there are no secondary markets available where you may sell your ownership position. It may take years to get back your original amount of invested capital.

Make sure you can bear to lose your entire investment. Yes, investing in private placements is that risky. There are ways you can help protect yourself––mainly by doing your homework and only investing a small portion of your portfolio––but there are absolutely no guarantees, no FDIC insurance, no Federal regulatory oversight, no nothing to protect your investment from total loss.

Private placement investing is certainly not for everyone––even if you meet the definitions of an accredited investor. It is, however, an option for high net worth women looking for alternative investment strategies that may help them to grow their overall wealth. While we cannot discuss any specific product on the market, we would be happy to review your investment portfolio and answer any questions you may have regarding private placement investing.

A parting note: Private Placements cannot be advertised and companies/brokers who do not have a personal relationship with you are not allowed to market their investment to you. If you receive an unsolicited phone call about the next great investment deal, hang up. The old adage is correct. If it sounds too good to be true, it probably is.

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Cathy DeWitt Dunn of DeWitt & Dunn, LLC, is the driving force behind Women Money & Power. With decades of experience in the financial services industry, Cathy has dedicated her practice to educating clients on how to take maximum advantage of financial solutions that are not available in traditional brokerage houses. Cathy is proud to be on the forefront of innovative financial solutions for the individual investor.

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