10 Red Flags To Consider When Reviewing Private Offerings
The origination department at North Capital has reviewed hundreds of PPMs, thousands of pitch decks and spoke to countless founders, real estate sponsors and fund managers. Sifting through thousands of issuers can be a daunting task, but common red flags help disqualify large swaths of potential issuers. These 10 red flags should be noted and the issuers that employ them are best avoided.
1) Guarantees of profit or specific return.
Only death and taxes are guaranteed.
2) Unclear or convoluted business models
If an issuer cannot clearly explain what they are doing or how they are generating revenue, they’re probably trying to hide something.
3) Statements asserting or suggesting regulatory approval
(Example: This offering has been validated and approved by the Securities and Exchange Commission) Regulators never approve securities offerings. An issuer may make a filing on a regulatory database, but that filing does not grant any approval status.
4) Overly consistent returns over a long period of time
Even Warren Buffett, one of the most successful investors in the world, has made losing bets. Investments fluctuate over time.
5) High forward-looking returns
Does a 100x return sound good? Think again. If it seems too good to be true, it probably is.
6) The use of definitive statements and superlatives
They’re probably not the best if they have to tell you they are.
7) Cherry-picked returns or data
100% revenue growth sounds good until you find out it grew from $1.00 to $2.00.
8) Bad actors in management
Fraudsters may have a public record of impropriety. Before making an investment, Google the management team and if possible, run full background checks.
9) Offering materials are poor in quality
You wouldn’t give your money to a 12-year-old so don’t give your money to someone who writes like one.
10) Unregistered products or finders
All securities and individuals selling securities must be registered or rely on a proper exemption from registration.
