Question: How can you tell if an investment offer is a scam? And if the investment offer is legit, how can you tell if it is a good one?—asked at “Ask a friend, ask Efren” free service available at www.personalfinance.ph, Facebook and SMS.
Answer: The quickest way to find out if an investment offer is a scam or not is to check if the company has a secondary registration license with the Securities and Exchange Commission (SEC) to sell investment securities to the general public.
When a company is registered with the SEC, it automatically gets its primary license. But that license only allows the company to do regular business. If that company intends to sell investments to the general public, the law requires that the company apply for a secondary license to register such securities. The implementing rules of the Securities Regulation Code state that:
“No securities shall be sold or offered for sale, or distributed by any person or entity within the Philippines unless such securities are duly registered with the Commission through Form 12-1, and the registration statement has been declared effective by the Commission except of a class exempt under Section 9 of the Code or unless sold in any transaction exempt under Section 10 thereof and these Rules.”
The rules on exemption from registration are very strict and specific. Changing the term of the amount being solicited from investment to donation, for example, does not automatically change the nature of the transaction if what are being solicited are investments for all intents and purposes.
And even if the registration of the securities is approved by the SEC, such approval does not constitute an endorsement of the securities by the regulator. The investor must make his own determination.
And so how does the investor assess a potential investment. There are two major parts, one being the viability of the investment itself and the other is if the benefits of the investments match the investor’s return objectives and risk preference.
On the viability of the investment itself, an outline that one can follow in analyzing the investment is PMPM or production, marketing, personnel and money. These are actually the four departments in any business that need to be coordinated so that a business, which is what a person will be investing in, will run efficiently and effectively as a whole.
The following is a noncomprehensive guide to what to look for under the PMPM analysis:
• Production—product/service idea, operation design, quality control, operational milestones, bargaining power with suppliers.
• Marketing—industry analysis, target customer, potential competitors, marketing plan (e.g. ads, promos, sales commissions, distribution channel management), bargaining power with customers.
• Personnel—key (management) personnel, board of directors or advisers, other investors.
•Money—financial projections including debt/equity financing, free cash flows, return on equity.
As to the suitability of the investment offer, suitability tests can be applied. An analysis done by a financial planner can be a substitute as that financial planner can help quantify the goals of the investor and match these with the potential returns (and attendant risks) being offered.
Admittedly, the foregoing analysis is daunting to the average investor. But it is a must before any investor should part with his hard-earned money.