Our discussion begins with the recovery of invested funds. We encourage investors to involve attorneys, accountants, and other professionals at the investment selection stage, although attorneys are commonly engaged after the fact. Fortunately, recovery is possible and quite common. Timing is important though and action should generally be quickly taken. For larger issuers, a public market exists and the share price is generally much more stable. In a private placement, there is typically no public market developed for the securities and issuers are using or depleting capital as it is being received. The end result may be a fight with other creditors or defrauded investors to recover what may be remaining.
The most common method in which to recover funds, following a commitment or transfer, is with allegations of fraud. The disclosure requirements for securities offerings are fairly broad and few of the smaller issuers have the means or ability to comply. A single omission or misstatement may serve as grounds to raise common law, state, and federal securities fraud claims. The issuer and management then face a difficult choice because of the time and expense in defending securities fraud suits as well as the damage such claims leave behind. Even mere accusations of fraud may interfere with professional licensing and additional capital raises and, if a lawsuit is successful, a finding of fraud may result in the end of management’s career in the securities business or as an officer or director.