Understanding the Risks Behind Some Reg D Offerings
I meet with a former SVP from one of the largest banks in the world on a monthly basis. We usually catch up on things we're working on and explore different ways to work together. During today's call, I mentioned that my plan was to expand the types of deals I raise money for. Instead of just raising for lending opportunities, the plan is to get into larger deals. With excitement, he explained the process of setting up a fund and then went on a tangent. He mentioned a specific, non real estate related deal that was sent to him, that raised a lot of red flags. Nothing was done illegally. The fund was structured within the confines of the law, however, many Reg D offerings are less standardized and lack transparency. Proformas are assumptions, not proof. You have limited exit options once you're in.
1. Illiquidity Is the Norm, Not the Exception
Most private placement investments are highly illiquid by design.
• Restricted securities are typically issued, meaning they cannot be freely sold or traded on a public exchange.
• Secondary markets often do not exist, leaving investors with no practical exit until a liquidity event occurs, if one occurs at all.
• Issuer-controlled exits are common. If redemptions are allowed, they may be subject to lockups, redemption gates, or company approval, and may occur at a discount to the original investment.
Investors should assume their capital may be tied up for years with limited ability to exit on their own terms.
2. Disclosure Standards Are Not the Same as Public Markets
Private offerings are exempt from many of the disclosure requirements that apply to public companies.
• Form D filings are notice filings, not approvals. They do not imply that regulators have reviewed the deal, the projections, or the fairness of the offering.
• Financial projections may be optimistic, forward-looking, and not independently verified. Valuations are often based on assumptions rather than operating history.
• Audited financial statements are not always provided, which places a greater burden on investors to verify the company’s financial condition.
The absence of standardized disclosure increases the importance of independent due diligence.
3. Marketing Language Can Obscure Economic Reality
How an offering is presented can materially differ from how it actually functions.
• Targeted returns may be framed as stable or predictable, even when the investment is equity-based and not contractually obligated to pay distributions.
• Capital may be used for operations, overhead, or growth initiatives rather than for discrete, income-producing assets.
• Complex structures can mask simple economics, where investor capital is effectively funding business operations in exchange for hoped-for future performance.
Investors should clearly understand whether they are providing debt, equity, or quasi-debt, and what rights that structure actually provides.
4. Incentive Alignment Matters
One of the most important factors in evaluating private placements is how incentives are structured.
Potential areas to examine include:
• Whether sponsors receive significant upfront fees regardless of investment performance.
• How much of the sponsor’s own capital is at risk alongside investors.
• Whether ongoing compensation is tied to actual operating results or simply to capital raised.
Misaligned incentives can exist even in legally compliant offerings.
5. Practical Due Diligence Questions
Before allocating capital, investors may want to ask:
• What is the realistic path to liquidity, and who controls it?
• How exactly will investor capital be used?
• What assumptions drive the projected returns?
• What third-party oversight exists, such as audits, administrators, or independent valuations?
• What happens in downside scenarios?
Clear answers to these questions are often more important than headline returns.
In this particular situation, the group raised millions to launch and scale a logistics company. They gave themselves 24 months to execute. Returns are completely dependent on execution and/or liquidity events. None of the money is used to acquire hard assets.
The whole point of this is to say that you have to know what you're getting into. The structure of these "deals" matters more than the marketing.
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Understanding the Risks Behind Some Reg D Offerings
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