Here’s the latest instalment of the I’m-not-calling-it-fraud-of-the-month series.
This lesson actually derives from two separate exempt offerings where financials that looked legit at the outset turned out to reflect a different reality.
Company A presented financials that showed substantive revenues. However, those revenues were derived from related companies (a fact that was not disclosed) and were going out as expenses to those same related companies in a closed loop. That fact was discovered when we started looking into the identity of the company’s customers, and kept encountering the same business models. Hmm.
Company B was even odder. Here we didn’t even need to do much digging, because, when asked to explain discrepancies between the draft Form C and the financials the company had sent us, the company’s accountant sent us financials for a supposedly unrelated company which matched Company B’s financials. Oops.
Lessons for issuers here: This one is obvious. Don’t lie about related parties: doing so would likely be treated as a fraudulent misleading statement. (And don’t let your agents send the wrong documents to the fact-checkers!)
Lessons for intermediaries: Cross-check for related parties, and do at least some diligence on the source of revenues.
Lesson for investors: Invest on platforms that do check things like where an issuer’s money is coming from, and if the fact that a company has revenues is important to you, use the platform chat function to ask questions.