Too often clients come into my office wanting to invest with a friend or a friend of a friend who has the latest and greatest business opportunity. The returns are grand, the opportunity is limited, and only the select few who get in fast will get the rare opportunity to participate. Most of the time I quickly guide my client away from the proverbial cliff. Sometimes it is too late and a person has already invested his or her hard earned savings. The results can be devastating. I’ve seen the same unfortunate outcome occur with all different types of people including the most seemingly educated wealthy individuals at one end of the spectrum to the elderly widow trying to get by on a fixed income on the other end of the spectrum. I love Utah, but I also know it is a hotbed for affinity fraud. Whether it’s our trusting nature, are often strong religious ties, or something else, too many people in Utah make poor decisions when it comes to handing over money for the next great opportunity. During my time as an attorney and certified public accountant, I have compiled a list of questions that I believe need to be asked and answered before any money changes hands. These questions are as follows:
1. Has there been an audit of the company or individual by a reputable CPA firm in order to verify assets and business operations?
2. How frequently will the company or individual be audited by a reputable CPA firm?
3. Have you requested bank statements directly from the bank?
4. Have you requested tax returns directly from the IRS?
5. Are the organizers or promoters of the company investing their personal funds?
6. Have you contacted your state securities office to see if there is anything reported on the business or its promoters?
7. Have you researched whether there are persons involved that have been previously sued for investment/securities related claims?
8. What is the track record of company management?
9. If you are lending money and receiving a promissory note are there assets that you can use to secure your investment?
10. Have you checked to determine whether the assets that will secure your investment are actually owned by the borrower and free of other liens?
11. How will your rights to the secured assets be recorded for notice to other potential investors/creditors so you retain the first claim to the assets? (Trust deed, UCC 1 filing statement, etc…)
12. What will you have to do to liquidate the secured assets if the investment goes bad?
13. Will there be personal guarantees by owners of the business or by others?
14. If there will be personal guarantees, what assets do the guarantors have to satisfy the debt?
15. Will you be able to liquidate the assets of the guarantor or will those assets be protected by law (IRA, 401(k), homestead, etc…)?
16. Who will be first in line for distributions if the business liquidates?
17. How will the earnings on your investment compare to the earning of the promoters of the investment?
18. Will the business you’re investing in conduct activities with parties related to the organizers/promoters? If so, what safeguards are in place to make sure there the terms of transactions are fair?
19. When will you get your money back?
20. Does the return on investment sound too good to be true?
21. Have you requested Foreign Bank Account Reporting Statements (FBAR) from the IRS in order to determine whether promoters hold assets offshore bank accounts?