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National Securities Corporation Scam: Selling Non-Existent Pre-IPOs

Securities Lawyer Jonathan Kurta
By: Jonathan Kurta Author

National Securities Corporation allegedly deceived their customers when they sold pre-IPO offerings that did not exist. Meanwhile, National Securities Corporation allegedly earned placement fees for these fraudulent offerings. The firm has entered into an Acceptance, Waiver, and Consent agreement with FINRA in which they agreed to repay investors $363,447.67 in addition to a $300,000 fine. You can read the full AWC here

Keep reading to learn the details of National Securities Corporation’s alleged deception. 

National Securities Corporation: Private Placements 

National Securities Corporation offered interests in private companies that planned to debut their stocks through an Initial Public Offering (IPO). To sell these interests, National Securities Corporation used private placements created by their affiliated investment adviser, National Asset Management. National Asset Management negotiated with company shareholders to determine the price for a private placement. Investors bought these interests believing that they would be able to buy shares at a specified price once the private company went public. 

How Did National Securities Corporation Allegedly Deceive Investors? 

FINRA alleges that “Company A” was the subject of speculation that it would conduct an IPO soon. National Asset Management found a seller who was willing to sell $10 million of Company A shares for $9.75 per share. National Securities Corporation sold interests in these shares through their first offering.

However, FINRA states that in December 2017, National Securities Corporation approved two separate offerings of Company A shares, both of which were managed by National Asset Management. Both offering documents stated that Company A would be acquired at a maximum price of $9.75 per share. All the shares, however, were already spoken for in the first offering. There were no more shares to allocate to the second offering. 

Despite the absence of available shares, National Securities Corporation continued to sell shares of a second offering. The firm received $3.45 million from 38 investors for the second offering. National Association Management sent the investors “welcome letters” that confirmed the investors’ ownership interest in the offering. 

These welcome letters never stated that there were no Company A shares currently available. 

In return for selling interests in a non-existent second offering, National Securities Corporation received placement fees. 

  • National Securities Corporation received a payment fee of $345,000 in 2017.
  • In January 2018, NSC received an additional $60,500 placement fee. 

Throughout 2018, National Securities Corporation allegedly failed to disclose the status of the second offering. Investors believed that their Company A shares would sell for $9.75. Finally, National Asset Manager found a party willing to sell shares of Company A for $20.22. National Securities Corporation allegedly failed to inform the second offering investors that the price of shares had more than doubled. In fact, they did not inform investors of the share price until 2019, right before Company A’s IPO. 

What Are Private Placements? 

Private placements are risky investments. Unlike publicly traded companies, these companies do not have to make their financials public. 

Private placements are regulated under the SEC’s Regulation D. Most private placement shares are sold to accredited investors—i.e., investors who have a net worth of over a million dollars, or who have an annual income of $200,000.

Brokerage Firms Are Required to Understand Regulation D Offerings (Private Placements) 

Despite the limited information offered by a private placement, regulators still require brokers to thoroughly investigate private placement. Brokers who sell offerings that do not exist or mislead investors about the price of shares are, at the very least, negligent

Regulatory Notice 10-22 emphasizes the obligations of broker-dealers to investigate Regulation D offerings. 

At a minimum, broker-dealers are required to gather information concerning the following: 

  • The issuer and its management;
  • The business prospects of the issuer;
  • The assets held by or to be acquired by the issuer;
  • The claims being made; and
  • The intended use of proceeds of the offering.

National Securities Corporation allegedly went beyond failing to verify claims. FINRA alleges that the firm knew the shares did not exist and sold interests to investors anyway.  

Does a Private Placement Suit Your Needs? 

If you are not an accredited investor, there is a good chance that a private placement does not suit your risk tolerance — even outside of a brokerage firm’s alleged deception. FINRA Rule 2111 requires that investors consider their investor’s financial situation before they recommend investments. If you did not specify a high risk tolerance, your broker should probably not have recommended a private placement to you. 

You May Be Able to Recover Losses from National Securities Corporation

Investors who lose money due to their firm’s deception may be entitled to recover losses. If your firm misled you about an investment, reach out to a securities attorney to learn what steps you should take next. Our securities attorneys have experience fighting negligent brokerage firms and can help you restore your funds as quickly as possible.

Securities Lawyer Jonathan Kurta
Written by: Jonathan Kurta

Jonathan Kurta is an accomplished securities attorney and a founding partner at Kurta Law.