Top 10 “Red Flags” for Private Placement Programs

With the recent increase in private placement, project funding, and bank instrument related fraud, it is now more crucial than ever to identify suspicious actions. Though this may seem like common sense, the problem is, until our blog was created there was no reliable information source which defined truth and dispelled myth. As we have done with all of our articles on private placement programs, this list of common “red flags” will provide unique insight and invaluable tools to help you on your path to success.
By staying attentive to common warning signs, such as the ones we will discuss below, you can approach each private placement transaction with diligence and realism. Though many of these tips may seem simple at first, applying them correctly can be the difference between a life of wealth, and a trip to the “school of hard knocks”. Take a look below, these tips can save you millions!
Top 10 Red Flags for Private Placement Programs
1. Private Placement Programs with VERY High Returns: If you hear about a private placement investment yielding over 50% per week, it is UNLIKELY to fulfill its promises. Unless you have over 100M, and are extremely lucky, you are barking up the wrong tree. Please review our article on private placement program yields for more information.
2. Programs which “Piggy back” or Pool Investors to Meet a Minimum: Pooling investors for private placement programs is risky, and unfortunately, it is quite frequent in today’s private placement world. The problem is, if you have a large number of investors in a private placement, there is a good chance that one will “cry wolf” because they feel uncomfortable due to the lack of transparency. Once that happens, which it usually does, the SEC, FBI, etc. will begin an investigation that could last years, freezing everyone’s assets.
3. “Ping” Programs, or “Administrative Holds”: Private placement “ping programs”, or programs that require administrative holds, are everywhere but rarely ever work. The problem is simple: there is no collateral on hand to stimulate the line of credit for the private placement trader. Many inexperienced private placement brokers push these deals, NEVER succeeding despite years of efforts.
4. Claims of “No Risk” for the Investor: In any alternative investment, there is always risk. This is especially true for private investments, due to their unregulated nature and high risk strategies. Despite what many brokers may say, private placement programs DO carry risk. To be successful in any private placement, you must always collateralize your funds, and assign them to the trader. If the trader defaults on the line of credit, the funds of the investor can be seized.
5. No One Vouches for their Success with the Trader: If you are investing in a private placement program, ALWAYS be sure to speak with someone who has been successful with the trader. Investors who choose to move forward with a private placement program which hasn’t been vouched for are taking a huge risk. To state the obvious, acting as a “guinea pig” is not the best decision when seeking private placement.
6. The “Program Manager” Slips Up: If you ask the same questions twice, and the program manager changes their answers even slightly, you should dig deeper to look for more inconsistencies. Think of your conversation with the representative and trader of the private placement program as a psychological analysis. Every response, tone, and answer should be assessed to ensure you are comfortable before moving forward.
7. Traders that Accept Leased Bank Instruments: If a private placement trader accepts a leased bank instrument, move on before you waste your time. No REAL private placement program will accept funds which you do not have full control over. Though leased bank instruments have become extremely popular, in all reality, you have a one in a million shot of being successful. For more information, visit our article on the FACTS of bank instrument leasing.
8. Private Placement Programs that Accept Hard Assets: If you have hard assets, and are looking to get into a private placement program, then please be safe. Unfortunately, there is a liquidity crisis worldwide, and it is very tough to get banks to loan against illiquid assets. In all honesty, your best bet is to sell the asset, and invest a portion of the earnings into a private placement program.
9. “Bullet Programs”, or Short-term “Leveraged” Programs: Short term or “bullet programs” typically promise extremely high yields, and very rarely work. Most real private placements last 40 weeks, due to the contractual agreements between the trader and their exit buyers who purchase the medium term notes (MTN)/bank guarantees (BG). Usually, short term programs claim to “leverage” the funds, and by doing so, “create immensely higher returns”.
10. The Old Fashioned Bait and Switch Technique: If a private placement program seems too good to be true, look out for the infamous “bait and switch” technique. In many cases, private placement brokers will paint a rosy picture of the process, and then switch the terms once the investors is so excited that they are ready to do whatever they need to get the “high returns”. This is very common, so investors must ALWAYS be aware of this unfortunate scenario when verifying the details of any program with the trader.
Though there are plenty of actions which can be considered “red flags” in private placement, we have listed the most common scenarios above. If you remember nothing else from this article, a good rule of thumb is: if it sounds too complicated, or too good to be true, it usually is.
As with any other material we publish, reading can teach you a lot, but applying the knowledge and tips we provide is far more important. We didn’t write this article for fun, look for any sign of inconsistency, and act if needed before it’s too late. Remember, common sense is your friend, and when you choose to follow hope over rational thought, the oasis will always disappear when you arrive.
Submitted by InsideTrade Staff on Monday, 28 September 2009