When Does the Investment Really Exist?
Investment News reported on the federal sentencing of a college student for 3 and ½ years to do and a restitutionary fine of $4.18 million for collecting investments for a non-existent hedge fund. His mother helped him and she was sentenced to two years for wire fraud. Her defense was that her son made her do it. The kid pulled it off posing as a wealthy Turkish heir.
This type of thing happens every day in America. The more typical scenario is that a fledgling and usually floundering company is obtained in a reverse merger with a shell public company. The public shell is usually owned or managed by an entrepreneurial sort and the fledgling start up company is usually desperately and unsuccessfully searching for venture capital. The fledgling start up company could be a company with a new technology it is trying to bring to market, or more likely, it is an idea in search of a metamorphosis from dream to reality. In either case, the company usually has no capital or is very thinly capitalized, cannot quite make a case to venture capitalists, but now has shareholders that either need an exit strategy or are unwilling to wait until the idea matures into product.
In these situations, it is difficult to separate the pump and dump schemes from the legitimate search for capital. This problem is not limited to penny stocks sold on the bulletin board, but happens all over the market. It is nothing to see, as it was at the beginning of the decade and is once again, an internet company with few hard assets valued at hundreds of dollars per share while a company with billions of dollars in assets, like a bank or insurance company, is valued at share prices in the tens of dollars. The “market” is often not rational.
When trying to determine whether the investment is bona fide, common sense is the first line of defense. If the proposed product sounds impossible, it probably is impossible under present technology. Does the company merely have a good idea in search of a way to reach this plane of reality, or is there a real plan to bring the idea to concreteness and then to market? While it is true many of today’s financial titans started in somebody’s garage just a few decades ago, the question is, what is keeping this company in the garage? If the company, or the person promoting the stock, cannot or will not disclose the reason mainline venture capitalists are not interested, then it is unlikely the company can or will disclose the truth about much else, especially to stock purchasing investors.
