A few weeks ago, I was on a call with a prospective investor.
He was trying to work out which of our deals required him to be accredited, and what it even meant to be an “accredited investor.”
Then he dropped the line that was the root of his questions:
“I just want to be careful – my financial advisor told me that deals like these are all unregistered securities.”
It’s a line I’ve heard often from the CFP-rated prognosticators on LinkedIn – a line that sounds smart, technical, and lands with a prick of doubt.
It’s a technically-true statement – but it doesn’t mean what the CFPs are using it to imply.
“Unregistered” Is the SEC-Approved Path
What’s known as “Reg D” is an exemption framework the SEC explicitly created so private capital could be raised among accredited and sophisticated investors – and “unregistered” is the SEC’s own term for this framework.
It doesn’t mean off-the-books, fraudulent, or outside the law. It means a specific, legal category of investment offering with its own disclosure requirements, investor-qualification rules, and reporting structure.
Fear-mongering CFPs use the “unregistered” term to imply that these deals are invisible to the SEC – but the SEC absolutely knows these deals exist.
Every time a sponsor launches a new deal and takes on investors, they file a disclosure with the SEC (Form D). These are searchable on the SEC’s own website…on an interface I’m pretty sure was built in 1995, but it’s there. “Unregistered” is not “off the radar.”
A second assumption baked into the “unregistered” line is that SEC registration protects investors…but not so fast, my friend.
Registration Didn’t Stop Enron, WorldCom, or Madoff
The implicit reasoning is that registration means safer. The SEC reviewed it. Big institutions stand behind it. Somebody competent signed off.
But that reasoning has a long track record of being wrong.
Enron was a Fortune 10 company, audited by Arthur Andersen (RIP), fully “SEC-registered.” Roughly $74 billion in shareholder losses.
WorldCom was a publicly-traded telecom giant. An $11 billion accounting fraud vaporized roughly $180 billion in investor wealth.
Bernie Madoff operated under SEC broker-dealer registration for decades before being separately registered as an investment advisor in 2006. The SEC examined his firm multiple times. They missed his Ponzi scheme every time.
Registration guarantees filings, disclosures, and fat fees for all the companies involved. It does not guarantee competence, integrity, or protection.
You’ve Been Outsourcing Diligence
Consider what you actually get when you buy 100 shares of Apple (or any public, “registered” stock).
You can read the 10-K. You can read what analysts say. But you cannot call Tim Cook. You cannot get the CFO on the phone to walk you through his thinking. You’re at the end of a long chain of intermediaries (analysts, auditors, regulators, etc.) and you hope they did their jobs.
With a private placement deal, you get a risk-disclosure document similar to a 10-K (the private placement memorandum), plus a layer of access you don’t have with a stock:
You can call the sponsor and ask them anything
You can talk to previous investors who’ve been through multiple deals – and ask what actually happened, good and bad
You can pressure-test their assumptions in conversation, with the person who built the model and is responsible for execution
You can talk to the actual decision-maker who will be making calls with your money
None of that automatically protects you. But it makes real diligence possible – more than a registration label ever does.
The Real Question
Remove the “unregistered” fear-mongering and you’re left with one question: is the protection you think you’re getting from a registration label the protection you actually have?
I told the investor on that call that yes, his advisor was technically right – but no, it doesn’t mean what he was being told it means. The “protection” the advisor was implying he’d lose was never really there to begin with.