How Can The Private Equity Market Go So Wrong – Mismanagement Or Outright Scam?

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What can we learn?

I like to share two different perspectives for this case i.e. Company, and the Investors.

From the Company’s point of view, ACE, as a UPC (Unlisted Public Company), which sought to raise funds from the members of the public, shall be subjected to comply with the CMSA (Capital Market and Services Act 2007), and the relevant guidelines especially when the offer is made to retail investors.

For a company to effectively manage the public funds it secured through the fund raising, it must have a noticeably clear business plan. From this business plan, you would know how much would be needed for your project, how much are your costs (OPEX and CAPEX) for such project, how much revenue is targeted from the project. Furthermore, you should have a good SOPs and corporate governance for you to manage such project using the funds raised through the private placement.

There are many cases where a company raise a fund that is too big, and eventually, failed to effectively manage their own project using such funds. Reports of misappropriation of funds, breach of trusts etc started to go around as the company does not have a proper corporate governance, and the company falls into the trap of doing money game or Ponzi scheme. As the company needed to pay the dividend as promised, but not enough funds to cover the cost of fund (monthly or periodically), the company must opt to look for new investors, just to get the money rolling to be used for dividend payment of the former investors.

From the investors point of view, you should always know your rights under the law. I might sound like a broken record here, but the most important thing to do before you decide to invest is, due diligence. Dig out everything you can find about the company, the offer, the project etc before you decided to invest and accept such placement offer by the company.

You can always ask for the company’s secretarial documentation, audited reports, detail information of the project (i.e. if it is a plantation project, you can always ask for the location of the plantation, how big is the plantation, how much revenue has been generated through the project previously etc). Always be thorough in your line of questioning and request. Most people only looked at the ROI (Return of Investment) and just some vague information (and pictures) about the project before they decided to invest.

There are some red flags too that you may consider such as:

(i)                   The company refuse to show any detail information or documentations about the project or the company (any related documents which should not be confidential);

(ii)                 The Company refuse your request to have a site visit to your project site (plantation, office, factories etc);

(iii)                The ROI offered is “too good to be true.”

Most importantly, the CMSA requires a prospectus to be issued when shares of UPC are offered to retail investors. The said prospectus will also need to be registered with the Securities Commission (SC). UPCs are not required to issue a prospectus only when the shares are issued to sophisticated investors described or set out under Schedules 6 and 7 of the CMSA.

There are many cases I saw that the company only issued Information Memorandum (and not prospectus) to the retail investor, and declared to the investors that such Information Memorandum has been deposited to the SC. While this may be true, the practice itself is in contradiction with the CMSA and thus, this should be the biggest red flag that you should aware as an investor, especially if you are a retail investor.

The views are exclusively writer's own and do not necessarily represent the views of GC.

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