FINRA’s Spartan Capital Private Placement Case, Part 1: Private Placements, Reg BI, and the Atlas Funds Structure

This article is Part 1 of a two-part series on FINRA’s enforcement case against Spartan Capital Securities involving private placements and pre-IPO funds. In Part 2, I dig into FINRA’s specific due diligence and supervisory allegations and what they mean for investors and financial professionals. You can read Part 2 here.

In November 2025, FINRA’s Department of Enforcement filed a disciplinary complaint against Spartan Capital Securities, LLC, its CEO John Lowry, and its then–interim CCO, Kim Monchik. The case centers on a series of pre-IPO private placements sold through three affiliated “Atlas Funds,” and it is, at its core, a due diligence story.

For investors, the allegations are a reminder that complex private placements can hide enormous risks and fees behind glossy marketing about “pre-IPO access.” For financial professionals and compliance officers, the complaint reads like a checklist of what not to do when vetting and supervising private offerings under Regulation Best Interest (Reg BI) and FINRA’s suitability and supervisory rules.

In this first part, I’ll walk through what private placements are, why they’re risky, how Reg BI fits into this picture, and how the Spartan/Atlas/ StraightPath structure worked. In Part 2, I’ll dig into what FINRA says went wrong in Spartan’s due diligence and supervisory framework and what that means for investors and professionals.

As always, these are allegations in a pending FINRA proceeding. No findings have yet been made, and the respondents are entitled to contest the charges.

A Quick Snapshot of the FINRA Complaint

According to the complaint, between March and October 2021, Spartan recommended 346 private placement investments in 16 separate offerings to 191 customers, mostly retail. Those sales totaled about $24 million in principal and generated over $2.4 million in placement fees for the firm.

The offerings were membership interests in three affiliated private funds, Atlas Fund III, IV, and V, LLC (the “Atlas Funds”), which were controlled by Spartan’s CEO, John Lowry. The Atlas Funds, in turn, bought membership interests in SP Venture Fund 8, LLC (“StraightPath Fund”), which purported to own shares of specific pre-IPO companies. What investors were told they were getting, in substance, was access to shares of high-profile private companies before an IPO, but the path to that exposure ran through multiple layers of entities.

FINRA alleges that Spartan’s due diligence on both the Atlas Funds and StraightPath was inadequate, that offering documents obscured who was charging markups and how pre-IPO interests were sourced, that key conflicts of interest were not fully disclosed, and that the firm’s written supervisory procedures for private placements and Reg BI were skeletal and poorly implemented. The complaint frames these alleged failures as willful violations of Reg BI’s Care, Disclosure, Conflict, and Compliance obligations, as well as violations of FINRA Rules 2111 (suitability), 3110 (supervision), and 2010 (high standards of commercial honor).

Private Placements 101: What They Are and Why They’re Risky

Private placements are securities offerings that are exempt from the full registration and disclosure regime that applies to public offerings. They are often conducted under Regulation D and sold to accredited or otherwise qualified investors. Instead of a prospectus reviewed by the SEC, investors typically receive a private placement memorandum (PPM), an operating agreement, and subscription documents.

That structure matters because it reshapes the information landscape and the risk profile. On the information side, issuers have enormous control over what is disclosed. There may be no audited financials, no public trading market, and very limited ongoing reporting. Investors, therefore, rely heavily on what the firm and the registered representative tell them, and on the firm’s internal due diligence, which they never see.

On the risk side, many private placements are illiquid for years, if not indefinitely. There is often no ready market to sell out of a bad investment. In pre-IPO funds, the basic business model turns on a future IPO or liquidity event that may never occur. The value of your “pre-IPO access” may be far more theoretical than real if the underlying company does not go public or if the fund’s rights to the shares are weaker than advertised.

The Atlas Funds described in FINRA’s complaint illustrate an even more complex version of this model. Retail investors did not buy pre-IPO shares directly. Instead, they bought membership interests in a specific “series” of an Atlas Fund tied to a single pre-IPO company. The Atlas Fund then invested in StraightPath Fund, which purported to hold shares of that company. Each additional layer, from investor to Atlas series, from Atlas to StraightPath, and from StraightPath to the actual pre-IPO stock, adds fees, conflicts of interest, and due diligence obligations for the broker-dealer recommending the product.

Reg BI: Best Interest Obligations Applied to Private Placements

Regulation Best Interest, which took effect on June 30, 2020, did not outlaw complex products or private placements. What it did do was raise the bar for how firms recommend them to retail customers.

Reg BI’s General Obligation requires a broker-dealer and its associated persons, when making a recommendation to a retail customer, to act in the customer’s best interest without placing their own financial or other interests ahead of the customer’s. That overarching duty is broken down into four component obligations.

The Care Obligation requires reasonable diligence, care, and skill to understand the potential risks, rewards, and costs of a recommendation and to form a reasonable basis to believe the recommendation is in the best interest of at least some retail customers, and, when tailored to a specific customer, in that particular customer’s best interest.

The Disclosure Obligation focuses on transparency. Firms must provide full and fair written disclosure of all material facts about the relationship, including the services offered, fees and costs, and the conflicts of interest that are associated with recommendations.

The Conflict of Interest Obligation requires firms to establish, maintain, and enforce written policies and procedures reasonably designed to identify conflicts and at least disclose them, and in some cases to mitigate or eliminate them, where they might incline the firm or its representatives to place their interests ahead of the customer’s.

Finally, the Compliance Obligation requires firms to establish, maintain, and enforce written policies and procedures reasonably designed to achieve overall compliance with Reg BI. This is where Reg BI intersects most directly with a firm’s supervisory structure and written supervisory procedures.

For non-retail customers, FINRA’s traditional suitability rule, Rule 2111, still applies. Rule 2111 also contains a “reasonable-basis” obligation that requires firms to understand a product’s risks and rewards before recommending it to any customer. In the private placement context, Reg BI and Rule 2111 converge on a simple point: a firm cannot recommend what it does not understand. “Understanding” in this sense is not limited to the potential upside; it explicitly includes fees and markups, structural complexity, and conflicts of interest baked into the product.

Due Diligence in Private Placements: What “Reasonable” Actually Means

FINRA has long made clear that broker-dealers recommending private placements must conduct a “reasonable investigation” of the offering. FINRA Regulatory Notice 10-22, which is referenced in the Spartan complaint, underscores that a firm cannot simply take the issuer’s word for it. Instead, the firm must independently evaluate who the issuer and its managers are, what the issuer’s business prospects look like, what assets are held or are supposed to be acquired, whether the claims and projections in the offering materials have a reasonable basis, and how the issuer actually intends to use the proceeds. Reasonable investigation, in other words, requires a real understanding of the people, the business, the assets, the story being told, and the money flow.

Those expectations become even more demanding in layered structures such as a fund that invests in another fund that, in turn, claims to hold pre-IPO shares. In that setting, “reasonable” due diligence typically means confirming that the upstream fund truly owns, or has enforceable rights to, the underlying securities that investors are being promised. It also means getting a handle on the full economic stack: the firm should understand and quantify every layer of fees and markups, including any spread between what the upstream fund paid and what customers are ultimately charged.

Equally important is a serious review of the upstream manager itself: its track record, its regulatory and litigation history, its financial condition, and how it has handled investor money in the past. None of this matters if it is not documented and lives only in conversations and impressions. A reasonable investigation must be written down, written requests made, documents received, analyses performed, and red flags identified and resolved; so that, if challenged, the firm can show what it actually did and why it believed the offering was appropriate.

Absent that kind of rigorous, well-documented process, a broker-dealer recommending private placements is effectively flying blind. When the firm is flying blind, its customers are too, and that is precisely the scenario FINRA’s private placement guidance and Reg BI are designed to prevent.

What Comes Next

In Part 2, I will walk through FINRA’s specific due diligence and supervisory allegations in the Spartan case: what FINRA says went wrong at the broker-dealer level, how conflicts of interest and markups were allegedly handled, and what practical lessons both investors and financial professionals can take away from this enforcement action. I’ll also explain how I work with investors and industry participants who find themselves on either side of similar private placement disputes.

How I Help Investors and Financial Professionals

At AMW Law PLLC, my practice is dedicated to securities arbitration, enforcement, and regulatory matters, with a particular focus on complex products and private placements like those at issue in the Spartan Capital case. As an investment fraud attorney and securities arbitration lawyer based on Long Island, I represent individual investors nationwide who have suffered losses in brokerage accounts, private placements, and other securities products.

I bring a 360-degree securities industry perspective to these matters. Before founding AMW Law, I served as Senior Counsel in FINRA Enforcement in New York, litigated financial and securities disputes at Greenberg Traurig, and worked in-house in Legal & Compliance at Morgan Stanley. I now also sit as a FINRA arbitrator. That combination of roles, regulator, defense counsel, in-house compliance, and now also claimants’ counsel, shapes how I analyze private placements and how I litigate them. It also informs my work as a FINRA lawyer for financial professionals and firms who need practical, regulator-aware guidance.

For investors, that background allows me to dissect private placement offerings from multiple angles. I review offering materials, fee structures, correspondence, and account records to determine what product you were actually sold and whether your broker-dealer met its obligations under Reg BI, FINRA’s suitability rules, and applicable supervisory standards. When those obligations were not met, and you suffered losses, I pursue recovery through FINRA arbitration or in court, tailoring strategy to the facts of your particular case rather than forcing your claim into a one-size-fits-all template.

For financial professionals, CCOs, and firms, I help build and stress-test Reg BI-compliant private placement due diligence frameworks, revise written supervisory procedures, and design practical product-approval processes for complex offerings. I also represent registered representatives and firms in FINRA exams and investigations, including responses to Rule 8210 requests, and defend them in enforcement proceedings and customer arbitrations involving private placements, supervision, and Reg BI issues.

Whether you are an investor worried about a private placement in your portfolio or an industry professional facing scrutiny over complex products, you do not have to navigate these issues on your own. A focused, fact-specific review can clarify your rights, your risks, and the concrete steps available to protect your interests and move forward.