How do you know whether anyone has reviewed the details behind a sponsoring real estate company’s investment claims?
Or the return objectives they may have developed? How do you know whether any of that company’s principals may have had had earlier securities violations? Or whether anyone has at least spot-checked the claimed track record of that sponsor?
Most of all, how do you know whether the offered investment might be suitable for you?
Some online financial marketplaces may try to avoid working with a broker-dealer. They might believe the compliance efforts to be an annoyance, or they may simply be skating around the rules.
Purchasing securities through a broker-dealer can help alleviate many of these concerns. Broker-dealers are required to review such matters closely — and to keep records on their findings.
Why Are Securities Offerings So Regulated?
The stock market crash of 1929 exposed many flim-flam schemes that had been used to promote some stocks and other securities.
The basic securities laws in place today were largely implemented during the ensuing Great Depression. These laws are aimed at (among other things) improving the disclosures to investors in offering materials and creating rules around how stock exchanges and other securities markets function. The broker-dealer rules are focused on regulating the activities of the people who actually effect the securities transactions.
Don’t You Want to Talk to Someone?
In addition to the record-keeping responsibilities of broker-dealers, they are responsible for overseeing the people who may discuss investment opportunities with investors.
The broker-dealer rules make it clear that only licensed representatives of a broker-dealer can speak with investors with respect to most financial securities offerings.
These “registered representatives” are required to rigorous licensing exams, so that authorities have some assurance that they are reasonably qualified to talk to you about an investment opportunity.
That’s a pretty key consideration — the ability to talk with someone about an investment. Not too many people want to buy a big-ticket item without at least talking it through with an informed salesperson — and probably a few other people with whom you may have a separate trusting relationship.
Why Isn’t Everyone Licensed?
Some online financial marketplaces may try to avoid working with a broker-dealer.
They might believe the compliance efforts to be an annoyance, and certain transactions (like selling your own securities) may provide them with a loophole. Others firms may be simply skating around the rules.
But here’s why you should put your investment business with a marketplace that is associated with a broker-dealer:
Deal diligence. A broker-dealer is charged with ensuring that all of the required information is available and in good order, and with verifying a reasonable amount of the information provided by the sponsoring real estate company. It’s important that this role be filled by people who are assigned to do real diligence – i.e., with a view to safeguarding investors and ensuring regulatory compliance.
Offering materials. As with deal diligence, the offering materials are reviewed by the broker-dealer with a view to assuring that the offering materials reasonably describe the investment opportunity, are balanced and include an appropriate discussion of risks, and that no material misrepresentations are being made.
Advertising reviews. Most RealtyShares investment opportunities are not publicly advertised. But other advertising and publicity efforts are reviewed in an effort to try to assure that it complies with advertising rules (such as FINRA Rule 2210) and that no exaggerated or unwarranted statements are made. These reviews extend to marketing campaigns, the public portion of websites, webinars, and other materials outside of any official offering materials.
Payments and money flows. The careful handling of customer funds is a key element of a broker-dealer’s responsibilities. Checks and controls around diligence and investor approvals must be satisfied prior to disbursing funds – and often, third-party escrow agents are employed.
- Investor approvals. Registrants on the RealtyShares platform must confirm that they qualify as “accredited” investors. Broker-dealers take things a step further and run basic identity confirmations, and check investors against national security or financial fraud watchlists. They also put much more effort into the “know your customer” exercise, probing investors for information about their portfolio allocations and risk appetites.
This last practice is aimed at better determining whether an investment is suitable for a particular investor. For example, if an investor indicates that he needs the investment funds returned within a couple of years, then a longer-term investment probably isn’t suitable for him.
Broker-Dealers Are There to Protect You
The rules around broker-dealers are aimed at investor protection.
Broker-dealers do diligence on proposed deals and the related offering materials, keep advertising materials from making exaggerated statements, confirm that investments are suitable for particular investors, and help to put controls around the flow of investor funds.
The sector is closely monitored and broker-dealers must go through extensive periodic audits to confirm their practices.
Risk Factors with Respect to Broker-Dealers
The involvement of a broker-dealer does not serve to eliminate regulatory or transaction risk. All of the investments offered by RealtyShares are private offerings, exempt from registration with the SEC, and the disclosures are less detailed than would be expected from a registered public offering.
Ongoing disclosure requirements are negligible. The investments are also illiquid, with undetermined holding periods and no real preset liquidity terms.
These offerings are also only available to accredited investors, so the illiquid nature of any investment is heightened – further emphasizing the differences of these securities compared to registered, publicly-traded securities.