How to Complete “Due Diligence” if Investing in Private Placement

 

When considering a private placement program, you always need to be skeptical of the people offering the opportunity.  Since there are only a few traders in the world, the chances of you finding even one real trader are pretty small. Unfortunately, most people looking for a program have the odds stacked against them from the beginning. With this in mind, we felt it was critical to explain common methods of “vetting” a private placement trader.

 

Private Placement Due Diligence Tips

 

1. Trust your Instinct

Always trust your gut feeling on the trader, and never let “high returns” distract you from the transaction at hand.  Also, be careful when trusting your “gut feeling”, and make sure you are following common sense, rather than greed and hope.

 

2. Trader Experience

When you first speak with the trader, ask him about his background, and what lead him to become a trader of bank instruments.   If you are well versed in finance or private placement, it should be rather easy to tell who has legitimate experience, and who doesn’t.  Also, ask them how they developed such unique relationships with top banks, and exactly how the profits are generated in these transactions. If you hit them with a number of questions, there is usually an obvious stumbling point that you may need to examine further.

 

3. Estimated Profits

If you ever hear a private placement trader “guaranteeing” profits, then hang up the phone. No one by law can guarantee specific profits in a private placement transaction, they can only state historical returns.  Though it may sound like the opportunity of a lifetime, it isn’t. Think about it, if they really were a legitimate trader that managed millions of dollars, they wouldn’t be breaking the law for just one more client.  Also, if you ever hear someone speak of returns higher than 50% per week, no matter what the size of the deal (ex. 10 B), it is likely to fail.  As you know there is an economic slump, especially in the international banking system, which has lead to smaller margins on trades, leading to smaller net profits to clients.

 

4. Business Standing

When you speak to the trader, collect their business information and the state they are incorporated in. Once you receive this information you can check the Secretary of State website, and make sure they are a legitimate business. At that time, it is also important to see how long they have been in business, and who the officers are under that corporation. Once you retrieve the information of everyone with legal interest in the company, you can then make sure there are no pending legal suits against them, and proceed to background checks.

 

5. Background Check

Once you have the information of the PPP trader and company, it would be in your best interest to use whatever sources you can to complete a thorough background check.  This check should be on not only the trader, but the others who are registered with the trader’s company. Also, it would be a good idea to check out the closest people to the trader who introduced you to the transaction.

 

6. Trader’s Country of Origin

If the trader is located within the USA, then you have a much better chance to recover any damages if something were  to happen. On the other hand, if the trader is located in Europe or overseas, it may be much tougher to organize and win a court battle, especially if you are not a European citizen.  In essence, your money is basically lost if something was to happen with a private overseas investment.

 

7. Trading Banks Involved

To complete the transaction, you will need to most likely SWIFT, or block funds in favor of the trader’s account. If there is a big name bank involved that’s a plus, but most of the time the trading bank is not huge (ex. not UBS/ HSBC). If there are smaller less known banks involved, don’t be worried, it’s normal.  The most important aspect to focus on is the country of the bank, if it is backed by other banks, its history, and the banks size in relation to other banks in that country. This will give you an idea if something disingenuous may be ready to occur, or if you are clear to move forward.

 

8. Change in Program Procedures

Make sure that the original process the trader described is the process you are completing. In many fake private placement programs, the “trader” or brokers may use the “bait and switch” technique. For those who don’t understand this strategy, it involves explaining program details in a biased manor which makes the client feel extremely comfortable, and then switching around the final steps at the last second.  Needless to say, this is dangerous, and is usually associated with fake private placement programs.

 

9. Private Placement Contract

Typically a private placement contract is a Joint Venture agreement where the trader gets a certain % of the profits(30-50%).  The thing is, the contract has no references to specific returns, and usually is rather vague as to the responsibilities of the trader, and what they are trading.  Once again, this is a sticking point for some clients, but if you understand the laws associated with private placement programs, you would understand why the contract is structured this way.

 

10. The First Few Payments

You will never know if you have a real private placement program until it has paid out far more than the principal that has been blocked, or conditionally assigned.  With this in mind, don’t celebrate until you reached this point, and always be diligent with your attention to detail. The basic rule of thumb is if the transaction isn’t smooth from the beginning, it is likely to fail in the end.

In summary, the private nature of these programs may make some feel uncomfortable, but the opportunity is out there to be seized.  If you are interested in searching for the right trader, just refer to the tips above, and you will be armed with information that will make your search far more efficient.

Be careful, and remember to follow your common sense, not hope and dollar signs!

 

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