Lead Story…. Generally speaking, financial regulations have gotten tighter since the Great Recession. However, there is at least one notable exception that is causing all sorts of problems: Private Placements. Wikipedia defines a Private Placement as:
Private placement (or non-public offering) is a funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors.
Over the past several years, Private Placements have take off and actually account for a larger percentage of raised capital than public markets do, thanks in large part to tech companies putting off public offerings and privately funded real estate transactions. Indeed, the vast majority are legitimate and the capital is raised by people who understand the investment and tap networks of sophisticated investors. However, the Private Placement world has also drawn in a rather large contingent of scammers and unsophisticated/shady stock brokers selling crap to people who don’t know any better. The Wall Street Journal ran a story yesterday about one such scam that had some jarring statistics. Via the Wall Street Journal (h/t Mike Deermount) (emphasis mine):
One in eight brokers marketing private placements had three or more red flags on their records, such as an investor complaint, regulatory action, criminal charge or firing, the Journal found in a review of data including Securities and Exchange Commission records from September 2008, when they became electronically available, through 2017. That compares with one in 50 among all active brokers.
Brokers selling private placements also are six times as likely as the average broker to report at least one regulatory action against them, the Journal analysis found. (See the methodology.) The figures suggest a sharp expansion in brokered sales of private placements over the past decade has created heightened risks for individual investors.
The fact that bottom-of-the barrel-brokers are drawn to this sort of activity like proverbial flies to shit is a massive red flag in and of itself. The way that they are reaching their potential marks may be even worse. The WSJ detailed some of the methods being used to sell unsophisticated investors shares in a massive real estate fraud known as Woodbridge. This included newspaper and radio advertisements making hyperbolic low-risk high return claims and self-styled investment gurus pitching the investment their weekly self-help programs. It also included a cosmetologist (from Florida, of course) who was not licensed by FINRA or the SEC pulling in $8.1MM in revenue by setting up a scam financial advisory company and selling shares to investors. Woodbridge ultimately filed Chapter 11 bankruptcy and charges are still outstanding against it’s founder – but, hey, at least that cosmologist (and a bunch of other financial bottom feeders) got paid.
Taking all of the above into account, here is my list of red flags if you are looking at investing in a private placement in real estate or otherwise. If any of the following is true, stay away:
- The investment is being advertised on TV, radio and/or a newspaper ad.
- You become aware of the investment through an unsolicited blast email.
- Compensation from fees paid to intermediaries and the sponsor are not transparent
- A quick Google search of the sponsor or placement agent turns up anything questionable and the applicable party is evasive or defensive when questioned about it.
- The placement agent cannot clearly and concisely answer detailed questions about the subject investment and/or refers to marketing material, hyperbole or generalities when pressed.
- The placement agent cannot identify any potential risks when asked. Every investment has some type of risk associated with it otherwise it would have a return profile similar to a savings account. Anyone who tells you otherwise is lying.
- The opportunity is being pitched by an investment or self help guru – if they were really that smart, they would be investing their own fortune rather than trying to convince you to invest.
- The investment is being pitched with some variation “no-risk with large returns” – there is no such thing.
- Your gut is telling you that there is something wrong – if that’s the case it probably is.
At this point in the economic cycle, there is a lot of money trying to get into private deals and a lot of hucksters more than happy to separate investors from that money. Be careful out there and remember, if something seems to good to be true, it most likely is.
On the Upswing: The current era of low gas prices appears to be over and summer pricing is likely to be at its highest level in four years.
More Than a Setback: A recent California Supreme Court ruling made it a lot more difficult to classify workers as independent contractors and could be a major blow to gig economy as companies like Uber could eventually be required to follow minimum-wage and overtime laws and to pay workers’ compensation and unemployment insurance as well as payroll taxes.
Constructive Criticism: Cities that didn’t become finalists for Amazon’s HQ2 were given reasons for their exclusion by the tech giant and some are already making changes.
The Search for Yield: Foreign investors are still in love with the United States net lease market, even as Treasury yields rise.
Warning Signs: A some point in the future, California’s housing affordability crisis is going to lead to economic trouble as service and blue collar employees simply can’t afford to live here.
Up In The Trees: Lumber prices are going through the roof as the framing lumber chart goes parabolic to the upside.
Still Not Fixed: Despite tighter regulations since the housing crash, the expanding role that untested, non-bank lenders play in today’s market leaves reason for concern.
Beat the House: This story about a self-trained quant who dropped out of college, developed an algorithm that correctly predicted horse racing results and made a billion dollars in the process will be the best thing that you read this week.
Rules to Live By: Richard Jenrette co-founded investment bank Donaldson, Lufkin & Jenrette in 1959. He died last month of cancer at 89 and left a handwritten note on his desk entitled “What I Learned” (How to Succeed and have a Long and Happy Life). I highly recommend reading it – although I have to respectfully disagree about his policy towards swearing.
Bargain Basement: It’s now cheaper to get home-delivered groceries from Whole Foods than Kroger because Amazon.
Alchemy: A Norwegian scientist has patented a process to mix nano-particles of clay with water and bind them to sand particles in order to condition desert soil and make it farmable. Trials have been successful in the UAE which could be a game changer for farming in much of the world.
Chart of the Day
Source: World Property Journal
Say Cheese: A man in India died as a result of attempting to take a selfie with a bear because Millennials. (h/t Steve Sims)
Who Does Number Two Work For? A New Jersey public school superintendent was charged with defecating on a high school athletic field on a regular basis after he was caught by police. (I would give an h/t here but about eight of you sent this one to me at the same time and I’m still not sure if that says more about you or me)
Hero: A woman bet $18 on the Kentucky Derby and won a cool $1.2MM by correctly choosing the Derby winner as well as the winners of all four races leading up to the main event.
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