Regulation D Offerings: Issuers, Investors, and Intermediaries
By: Craig McCann, Chuan Qin and Mike Yan (Sep 2023)
The Reg D offering market is similar to
the public offering market in capital raised and has been growing
rapidly over recent years. The proceeds from Reg D offerings sold
between 2021 and 2023 total $6.2 trillion, 23% more than the capital
raised in registered offerings over the same period and a 86%
increase over the proceeds from Reg D offerings sold during 2011-2013. Reg D securities have recently been sold to more investors
per offering with a less amount sold per investor, suggesting an
increasing retail preference for unregistered securities. Intermediaries
play an important role in reaching retail investors. Offerings
sold by broker-dealers with more retail clients and offerings sponsored
by investment advisers with more wealthy individual clients
are purchased by more investors per offering and raise less capital
per investor. Investors of unregistered offerings must be wary of
intermediariy misconduct and conflicts of interest. Broker-dealers
that receive more commissions and specialize in selling unregistered
offerings tend to receive more customer complaints stemming from
unregistered securities. Investment advisers with non-fund clients
are more likely to disclose conflicts of interest in regulatory filings
when they sponsor Reg D offerings, indicating that they allocate
client funds in self-sponsored unregistered securities.
Diversifying a Concentrated Stock Position in 2023
By: Susan Song, Regina Meng, Mike Yan and Craig McCann (Jun 2023)
Twenty years ago, we evaluated brokerage firms' recommendation that investors
should diversify a concentrated stock position by buying additional stocks on margin[McCann and Luo, 2003]
Twenty years later, some brokers and advisors continue to recklessly recommend
that their clients borrow against concentrated stock positions and purchase additional
stocks to diversify. In this note, we use recent stock market returns to update our previous work which used data from the 1990s. We also extend the analysis to cover a larger universe of stocks and employ more sophisticated simulations. Our updates and enhancements show that this "hold, borrow, and buy some more" strategy remains inconsistent with basic principles of prudent investment management; leveraged diversification perversely increases risk and or lowers expected returns.
