Annuities, Private Placements, and Illiquid Securities

An annuity is essentially a contract between you, the investor, and an insurance company. A primary reason investors purchase annuity contracts is to have a guaranteed stream of income in retirement.

Variable annuities tend to be more complex than traditional annuities because there is no fixed stream of income. Thus, the promised stream of income is a variable in the contract. Because of this, variable annuities can be risky and may not be suitable for you.

Private placements are unregistered and illiquid securities, generally offered through Regulation D (Reg D), an exemption from registration with the SEC, on an exchange like the NYSE or pink sheet OTC Markets.

Reg D is an outgrowth of the Securities Act of 1933 and specifically covers the regulation of private placements and their registration exemptions. Under Reg D, private companies can raise capital without having to comply with certain stringent SEC requirements, like companies going public. However, it is important to note that Reg D only applies to the transactions between the buyers and sellers, not the actual investments at issue.

Liquidity is a way to measure how easily you, the investor, are able to convert your investment holdings into cash. Investments with less liquidity will likely take longer to convert to cash, making them illiquid investments. One way to determine an investment’s liquidity is by the daily volume of shares being bought and sold in the market. A high-volume stock, like AAPL, will have more buyers and sellers able to transact and convert positions to cash at any given time, compared to a low-volume penny stock, which will generally have a lesser amount of buyers and sellers transacting on a daily basis.

Based on the definition of liquidity, illiquid securities are those that are not easily converted to cash. Due to the illiquid nature of such investments, they tend to be riskier and more speculative in nature, and thus not suitable for everyone. Alternative investments are usually illiquid assets.

When your broker recommends such investments, they should consider whether they make sense for you, given your age, risk tolerance, time horizon, liquidity needs, and more. Although suitability is the standard for recommendations made before June 2020 under FINRA Rules, the SEC’s Reg BI has incorporated its aspects and increased the broker’s standard of care and disclosure requirement. It is important that brokers know their customers when making such investment recommendations. If they were not right for you, you can sue for damages.