HJ Sims & Co. Inc. (“HJ Sims”) appears to have used Regulation D (“Reg D”) offerings to pass its risk of loss onto its customers while it retained the potential for significant gains. A scheme like this would violate numerous FINRA Rules and regulations, including suitability, Regulation BI (“Reg BI”), and due diligence obligations. See FINRA’s Due Diligence and Suitability of Private Placement. RIK’s investment lawyers are currently investigating potential claims related to HJ Sims’ possible improper sales practices.
Reg D securities are non-public offerings designed to help operating firms raise funding, and are exempt from certain security registration requirements. This type of private placement is offered by the “issuer,” and who, under the rules, is only required to make limited disclosures regarding the price of the offering – making it more challenging for investors to determine a fair price of the private placement when compared to publicly traded investments.
In the past 10 years, HJ Sims sold 93 Reg D Offerings (listed below), where most of the issuers of the Reg D bonds were owned and/or controlled by HJ Sims executives. Because of this, not only did HJ Sims gain commissions and other fees associated with the offerings, “[i]f a Sims’ Reg D offering failed, the executives would suffer a portion of the losses but realize all the gains if an offering succeeded.” See HJ Sims Reg D Offerings: Heads, HJ Sims Wins – Tails, Their Investors Lose. Ultimately, the risks associated with the Reg D offerings were passed onto the customers. As stated by SLCG Economic Consulting, “HJ Sims ability to shift losses to its clients would naturally lead it to invest in riskier projects with unusually high likelihood of failure.” See id.