Alternative Investments & Private Placement Attorneys

What are alternative investments?

Alternative investments is a broad category encompassing any investment outside of conventional publicly traded stocks, bonds, and cash equivalents. In the retail brokerage context, alternative investments typically refers to:

• Private placements — unregistered securities sold under SEC Regulation D to accredited investors
• Hedge funds — private investment funds using complex strategies including leverage, short selling, and derivatives
• Private equity funds — funds that invest in private companies rather than publicly traded securities
• Real estate funds and DSTs — private real estate investment vehicles including Delaware Statutory Trusts
• Interval funds — registered closed-end funds with limited periodic redemption windows
• Oil and gas programs — working interest or royalty programs in energy production
• Equipment leasing programs — partnerships that own and lease commercial equipment

Why alternative investments are systematically misrepresented

• Accredited investor status exploited: broker-dealers use accredited investor status — a financial threshold that makes investors eligible to purchase unregistered securities — to recommend complex, illiquid, high-commission products that would not pass public registration scrutiny. Being accredited does not mean being sophisticated enough to evaluate these products, and it does not waive the investor’s right to honest disclosure.
• Due diligence failures: FINRA rules require broker-dealers to conduct adequate due diligence on any product they recommend. Many broker-dealers failed to conduct meaningful due diligence on the alternative investments they recommended — accepting issuer representations at face value and failing to verify performance claims, strategy descriptions, or fee disclosures.
• Conflicts of interest: broker-dealers and their registered representatives frequently received elevated commissions, placement fees, and revenue sharing from alternative investment sponsors — creating direct financial incentives to recommend these products regardless of suitability.
• Liquidity misrepresentation: alternative investments are typically illiquid. Their lack of a secondary market means investors cannot exit even when they recognize a problem — creating extended periods of harm and damage.

Your Alternative or Illiquid Investments Might Not be Worth Their Value on Your Monthly Statement

The difficulty in pricing these assets stems from their unique characteristics and the infrequent nature of transactions involving them. Without a steady stream of market transactions to provide a clear indicator of value, investors must often rely on indirect methods to estimate the worth of these investments. This might involve complex valuation techniques that require a deep understanding of both the asset itself and the broader market conditions. For instance, the use of discounted cash flow (DCF) models, which estimate the present value of expected future cash flows, or the comparison to similarly structured deals in the same industry or geographic region, albeit these might still not capture the unique attributes of the specific investment.

Moreover, the lack of comparables further complicates this process. In more liquid markets, pricing can be benchmarked against a multitude of similar transactions and assets. However, in the realm of illiquid investments, each asset often has distinct features that can significantly affect its value, such as the terms of investment, the management team’s quality, and specific market risks. This uniqueness necessitates a more tailored approach to valuation, involving more assumptions and projections, which can introduce a higher degree of uncertainty and potential for error.

Secondary Markets or Expertise Is Required to Value Illiquid Investments

As such, the valuation of illiquid investments often requires the expertise of specialized financial professionals who are experienced in handling these types of assets. These professionals may use a combination of financial modeling, historical data analysis, and industry expertise to arrive at an estimated value. Nevertheless, despite these efforts, the inherent lack of liquidity means that the actual market price can remain uncertain until the asset is finally sold, potentially leading to discrepancies between estimated and realized values.

Investors in these markets must therefore exercise a high degree of caution and perform thorough due diligence to understand the risks and true value of illiquid investments. This often involves not only financial acumen but also a strategic approach to investment selection and portfolio management.

Some methods that can be used to price these types of investments include:

1. Market approach: This method involves comparing the asset to similar assets that have been recently sold or are currently available on the market.
2. Cost approach: This method involves determining the cost of reproducing or replacing the asset, and then adjusting for its fair market value.
3. Income approach: This method involves estimating the asset’s potential income and then discounting it back to its present value using a capitalization rate.
4. Expert Opinion: Hiring an expert in the field, such as an appraiser or a consultant, to provide an opinion on the value of the asset based on their experience and knowledge.

It is important to note that different methods may be more appropriate for different types of assets and that the value of an illiquid assets can be subject to change depending on the market and other factors.

Common alternative investment claim types

Bakhtiari & Harrison handles alternative investment claims across all categories. For specific product types see the individual pages for hedge funds, non-traded REITs, non-traded BDCs, TIC investments, MLPs, and structured notes.

Frequently asked questions — alternative investments

I am an accredited investor — does that affect my FINRA arbitration rights?

No. Accredited investor status determines your eligibility to purchase unregistered securities — it does not waive your right to honest disclosure, suitable recommendations, or the right to pursue FINRA arbitration claims for misconduct. Alternative investment fraud claims are fully available to accredited investors. Bakhtiari & Harrison regularly represents high-net-worth accredited investors including executives, professionals, and family offices in alternative investment fraud claims.

My alternative investment is a private placement — can I file a FINRA arbitration claim?

Yes, if the private placement was sold by a FINRA-registered broker-dealer. The claim is against the selling broker-dealer for failure to conduct adequate due diligence, misrepresentation, and unsuitable recommendation — not against the issuer itself (though court claims against the issuer may also be available in parallel).

What evidence do I need to bring an alternative investment claim?

Key evidence includes: the offering memorandum or private placement memorandum, any marketing materials provided by the broker, account statements showing the investment, correspondence with the broker about the investment, and your account opening documents showing your stated risk tolerance and investment objectives. Bakhtiari & Harrison can evaluate a claim with whatever documentation is available and can pursue additional documents through the FINRA arbitration discovery process.

For a full overview of the firm’s investment product failure practice, visit the Product Failure page.

Contact a alternative investment attorney — free consultation

Contact Bakhtiari & Harrison for a free, confidential consultation. Our FINRA attorneys evaluate every potential investor claim at no charge. Investor cases are handled on a contingency fee basis — no recovery, no fee.

Investor cases are handled on a contingency fee basis — no recovery, no fee.

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