Beware of Regulation D private offerings of debt and equity that don't trade

The original title is

An Iowa Farmer Tried to Dodge Stock-Market Turmoil. It Cost Him $900,000.

Certainly eye catching but.. here is the story

Over the past two years, bonds have lost almost 15% and stocks have barely gained 5%, whipsawing investors along the way. That’s what markets do. As a result, financial firms are pile-driving their clients into assets that have no market. Over the past two years, investors bought an astonishing $878.9 billion in so-called Regulation D private offerings of debt and equity that don’t trade, according to SLCG Economic Consulting, a research firm in McLean, Va.

These are different from Reg D offerings of “pooled investment funds,” which can include private-equity, venture-capital and hedge funds from major firms. Many of these other corporate offerings instead come directly from tiny issuers or through dodgy brokers and financial advisers. And, to be blunt, they are often dreck. The investments sometimes end up worthless, and egregious conflicts of interest are rife among those selling them.

The pitch for the private corporate offerings: Your bonds, which were supposed to be ballast for your stocks, have turned into torpedoes, and your stocks could get blown away any day.  Private placements of debt, equity and other assets don’t move in sync with public markets—and, because they don’t trade, their reported prices fluctuate much less.  They offer the hope of higher returns, since these smaller issuers often have to pay more to obtain capital. And, hey, every corporate titan started out tiny, and many legitimate companies have offered securities in this private market. 

The fatal flaw: You can’t always sell when you want to, and often you can’t sell at all. Financial disclosures range from minimal at best—an offering document, perhaps cursory annual or quarterly reports—to nonexistent. The risk of default or bankruptcy is high. Commissions and other fees can easily exceed 10%. 

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Jeff Temeyer, 64 years old, is a semiretired farmer in Independence, Iowa. In 2016 he invested in private debt and equity in a Texas cancer-treatment facility offered by a local broker, Dana Vietor. Mr. Temeyer, who says he was told he would earn at least 8% annually, invested more than $900,000 in all—only to learn that the securities were near-worthless. In 2020, Mr. Vietor was barred for life by the Financial Industry Regulatory Authority, which oversees how brokers do business. In November 2022, Finra arbitrators ordered Mr. Vietor to pay Mr. Temeyer and 10 other investors a total of $5.7 million in damages and other compensation. Mr. Vietor’s lawyer didn’t return requests for comment.

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In fact, it’s often illegal to sell these private offerings to anyone else, unless the broker or financial adviser who sold them to you takes them off your hands. Investors can avoid such headaches by trusting—but verifying. Buy nothing whose fees aren’t explicitly disclosed upfront in writing. Buy nothing without a prospectus or offering memorandum that discloses financial data, risks and conflicts of interest. Be wary of anybody who suggests putting private placements in your IRA or 401(k).

https://archive.ph/SeSnq#selection-579.0-583.334