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How to Avoid Common Investor Problems

The Financial Industry Regulatory Authority (FINRA) has published a best practices guide for investors that describes common investor problems and how they can be avoided. These are the most common complaints FINRA’s Investor Complaint Center receives, and recommendations for avoiding them.

1. Misrepresentation. Misrepresentation is an untrue statement or omission of material fact that a broker makes purposefully relating to an investment. This may happen with any security, but is more common with low-priced, speculative securities because they are riskier.

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An investor alert has been issued by the Financial Industry Regulatory Authority. The alert warns investors that private placements are risky and can tie up funds for a significant period of time.

A private placement is an offering of securities by a company that is not offered to the public at large and is not registered with the SEC. Many of these offerings are made pursuant to Regulation D of the Securities Act of 1933. Generally, one must be an “accredited investor” to make an investment in a private placement. Institutions such as banks and insurance companies, and organizations or trusts with assets of $5 million or more, are accredited investors.

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FINRA Issues Warning of Brokerage Firm Imposters

An investor alert was issued by the Financial Industry Regulatory Authority warning of calls from scammers falsely claiming to represent a well-known brokerage firm. In this scam, the imposters are claiming to be offering certificates of deposit with high yields, but the goal of the cold call is to get the potential victim to reveal personal or financial information. Such information may then be used in an attempt at identity theft or another crime. The fraud attempt is the latest twist on the common scam of “phishing” for information via cold calls.

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The SEC’s Proposed Crowdfunding Rules

On October 23, 2013, the Securities and Exchange Commission (the “SEC”) proposed rules under the Jumpstart Our Business Startups Act (the “JOBS Act”) to permit companies to offer and sell securities through crowdfunding.1 Historically, because offers and sales of securities to the public generally require compliance with the registration requirements of the Securities Act of 1933 (the “1933 Act”), crowdfunding has been restricted to non-securities matters, for example, to solicit donations. Under the SEC’s proposed rules, Section 4(a)(6) of the 1933 Act will be a new registration exemption available for crowdfunding offerings under certain conditions.

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Pursuant to Section 201(a) of the Jumpstart Our Business Startups Act (the “JOBS Act”), on July 10, 2013, the Securities and Exchange Commission (the “SEC”) approved final rules to eliminate the prohibition on general solicitation and general advertising* in securities offerings conducted pursuant to Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933 (the “Securities Act”).

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A recent court case throws into question the per se rule that covenants not to compete are unenforceable in New York when an employee is terminated without cause.

A number of decisions by the New York State Court of Appeals and the United States Court of Appeals for the Second Circuit had established a per se rule that employers who terminate an employee without cause would not be able to enforce any provisions of a covenant not to compete.

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The New York State Court of Appeals decided two cases recently regarding consideration in option contracts. The two cases, which involved many of the same parties, hinged on the granting of an option in exchange for consideration. In both cases, the court reiterated principles of contract law. The court ruled that when the cases involve sophisticated parties represented by counsel, the court will not examine the sufficiency of the consideration and will not permit extrinsic evidence to determine what “other good and valuable consideration” might be. If a party wishes to condition its contractual obligations on a particular performance by the other party, it should make that condition part of the written agreement.

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The Securities and Exchange Commission (SEC) has issued new rules for broker-dealers requiring them to search for securities holders if they lose contact with them.  The rules require for the first time that broker-dealers attempt to find securities holders that they have lost touch with.  Broker-dealers and other participants in the securities market must also notify people who have not processed checks that were issued to them in association with their securities.

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