Beware of the Project Funding Investment Scam
Over 7 years ago, when we first started working in the private placement business, it seemed everyone had a project in need of funding. Though many of these projects possessed great intentions and innovative ideas, very few had sufficient capital to invest in a real private placement program. With this obstacle in the way, most in the PPP market failed in their attempts to access project funding, leaving brokers and investors frustrated.
In today’s PPP market, things have stayed the same in some ways and are very different in others. After watching the demand for project funding skyrocket, many unsuccessful PPP brokers had enough. With a growing number of investors looking for project funding, PPP brokers started to look for a way to capitalize on this demand, whether it was ethical or not.
In this article we will explain viable ways to fund projects, while alerting you of a few scams that are far too common in today’s private placement industry. As most people know, the typical way to fund large-scale fund projects is by investing in private placement programs. Unfortunately, many investors now think there are other methods to fund projects, seeking new “programs” with lower entry requirements. As you’ll see, in most cases, these smaller “alternatives” turn out to be scams. To help you spot them the future, we have provided a great list for our readers. Covering five of the most common scams in private placement, it gives you everything you need to stay safe and productive. Scroll down and take a look!
Project Funding Scams
SBLC Leasing Scam: In recent years, the SBLC (Stand by Letter of Credit) has become very popular in the private placement business. In most cases, “providers” claim to have the SBLC issued from the bank for a small upfront fee. Supposedly, once the SBLC has been received by the investor, they can use it as collateral for private placement and other opportunities. Though this sounds great to naive investors, the truth is, SBLC leasing never works. First of all, SBLC’s are not discountable instruments, and no bank will “cut” an SBLC for a small upfront fee. Second, if the investor plans to attain an SBLC, they must give the full value to the bank before they issue it. In short, you can’t walk into a bank with 1M and get a 10M SBLC. Despite what many PPP brokers may claim, leased SBLC’s are not the way to go, no matter what type of transaction you’re pursuing.
Bank Instrument Leasing: The concept of bank instrument leasing has been growing in popularity since 2000. With more and more PPP brokers entering the business, it has become a niche that has polluted the private placement market. The problem is, leased bank instruments can rarely be used in transactions, whether it’s private placement or otherwise. Think about it, could you take a leased car into a bank and get a loan against it? The answer is obvious. Since you’ve only leased the asset and do not have full ownership of it, no bank accept it as personal collateral. Though many eager brokers may tell you otherwise, bank instrument leasing can only serve as proof of temporary collateral, and NOTHING else.
Small Private Placements: As we have stated in past articles, private placement investments require a large amount of capital to invest. Though there are programs which require smaller amounts, the truth is, you still need to have a lot of money to invest in private placement. In most cases, the investor must have 100M or more in liquid assets to even apply. Unfortunately, every investor seems to have interest in private placement, and due to this growing demand, brokers now see it as an opportunity. In today’s private placement market, ironically, you hear of more small programs than you do large. In fact, the PPP business has now become horribly polluted with “small programs” and “small investors”, both looking for something that doesn’t exist. Do yourself a favor, if you don’t have 50M+ in net worth, chalk it up! Even though other alternative investments may be great for you, PPP is only beneficial for those with sufficient capital.
Joint Venture Funding Scam: In recent years, I’ve started to hear about a project funding scam which is a little trickier than most. In this case, the “JV” partner leases the instrument to the investor for an upfront fee and a portion of the PPP profits. Since most investors are new to private placement, they feel encouraged to move forward with the leased instrument since they are “partnering” in a private placement investment. In addition, the investor feels comfortable because conversation typically shifts to the high yields of PPP, taking attention away from the instrument leasing process. The problem is, most private placement investments never turn out as planned. For example, if the program didn’t perform, the investor would spend 400k+ for a worthless bank instrument while the provider kept the leasing commissions. Though this may sound far-fetched, it’s become a common “back-end” scam in PPP, and there is little to no recourse for investors.
Upfront Fee to Fund Projects: If you are trying to fund a project, you should NEVER pay an upfront fee to attain funding. I don’t care if they have “sample funding letters” and “proof” of past funding success, it’s never worth it. We have been in the business for several years, and we’ve only heard of a few successful funding opportunities that required fees. We know, you may love your project more than life itself, but you should always take a step back and be smart. If you do choose to pursue a project funding opportunity with fees, make sure to ask yourself a few questions before hand. First, what proof does the funding provider have of their performance? Second, where is the money going, and how do you get it back if funding doesn’t occur? Third, do the fees, time frame and other details sound feasible? Last, does the funding provider have references from past investors? If you ask yourself these basic questions, it should always be any easy decision.
Though project funding scams come in all shapes and sizes, we have listed the most common schemes above. With the desperation of PPP brokers growing, unfortunately, project funding scams are on the rise. Since very few brokers in the private placement business are closing deals, many of them try to make commissions in any way possible. Whether its by sugarcoating details, or putting investors in harms way, its all about the paycheck for some brokers. For this reason and others, please be safe, because greed is a key variable in every private placement transaction.
In summary, the private placement market has become flooded with funding scams over the last decade. Though these scams are everywhere, the truth is, you CAN still be successful. In most instances, the first funding provider will NOT be the right pick, so stay patient. Remember, you never want to become desperate or anxious, or you can put yourself at great risk! You may want your project funded immediately, but the fact is, it’s never worth rolling the dice. Ask yourself, would you put 400k+ on one hand of poker? The answer is simple, just like identifying scams should be after reading this article…
InsideTrade LLC Staff
Phone: (949) 444-2111