According to FINRA, Ahmed Ghassan Gheith was fined $7,500 and suspended from association with any FINRA member in all capacities for one month for soliciting prospective investors to purchase private placement offerings without having established pre-existing substantive relationships.
Gheith solicited prospective investors to purchase private placement offerings claiming exemption from registration under Rule 506 of Regulation D of the Securities Act of 1933 but without having established pre-existing, substantive relationships with any of the investors. Gheith's member firm began participating in two different private placement offerings before he created a substantive relationship with any of the prospective investors. None of the prospective investors had previously invested in securities offered by the firm, nor did Gheith obtain investor questionnaires from the prospective investors prior to the time they agreed to invest in an offering.
In total, investors solicited by Gheith invested $175,000 in one of the private placement offerings. Gheith solicited all prospective investors before having a substantive relationship with any of them. The offers and resulting sales of the private placement offerings therefore did not qualify for an exemption from registration under Rule 506(b).
The suspension is in effect from January 17, 2023, through February 16, 2023.
Private placements are securities offerings that are exempt from registration with the SEC under certain conditions. Rule 506(b) of Regulation D provides an exemption that allows issuers to raise unlimited amounts of capital from accredited investors and up to 35 non-accredited investors, provided the offering is not publicly advertised or generally solicited.
When securities are sold through general solicitation (broadly advertising the offering to people with whom the seller does not have a pre-existing relationship), the offering must comply with different requirements under Rule 506(c), which requires all purchasers to be accredited investors and requires the issuer to take reasonable steps to verify that they are accredited.
FINRA has interpreted Rule 506(b)'s prohibition on general solicitation to require that, when a member firm participates in a 506(b) offering, the firm and its representatives must have a pre-existing, substantive relationship with prospective investors. This requirement ensures that the offering is truly private rather than a public solicitation.
A substantive relationship generally means the representative has sufficient information to evaluate, and does evaluate, the prospective investor's financial circumstances and sophistication in light of the investment. This typically requires the prospective investor to have previously invested with the firm or the representative to have obtained detailed financial information through investor questionnaires or similar means before discussing the specific investment opportunity.
Gheith's violation was that he solicited investors to purchase the private placement offerings before establishing any substantive relationship with them. The prospective investors had not previously invested with the firm, and Gheith had not obtained investor questionnaires before they agreed to invest. This meant Gheith was essentially making a general solicitation—offering the investments to people he did not know and whose financial circumstances he had not evaluated.
By soliciting investors without pre-existing substantive relationships, Gheith caused the offerings to lose their exemption from registration under Rule 506(b). This created potential liability for the issuer and the firm and undermined the regulatory framework that distinguishes private offerings from public offerings.
For investors, this case illustrates important distinctions in how private placements can be sold. If you are contacted by a broker you have never worked with before about a private placement investment opportunity, ask questions about the offering's exemption from registration and whether the solicitation complies with securities laws. Legitimate 506(b) offerings should generally be offered only to investors with whom the representative has a pre-existing relationship.
