We are often contacted by project developers, investors, entrepreneurs and brokers who are looking to raise capital, or who are looking for investment opportunities that provide higher returns for themselves or their clients. This initial inquiry often leads to a discussion of private placement programs and trade platforms.
Are Private Placement Programs/Trade Platforms Real or a Scam?
The first question we are usually asked is: are private placement programs (also known as PPPs) and trade platforms real or are they a scam? In short, they are real, but not in the way they are often described. There are many myths about these programs that we will attempt to dispel.
Perhaps the most common misconception regarding private placement programs and trade platforms is that they are the exclusive domain of the ultra rich through secretive, invitation-only investments. Often, clients are told that they must pay large, upfront fees to gain access to these exclusive instruments. In addition, they are told they must submit POF (proof of funds), a CIS (client information summary) or KYC (know your client) package, along with their passport. Nothing could be further from the truth.
How Private Placement Programs / Trade Platforms Work
Many private placement programs and trade platforms are legitimate investment vehicles that are accessible to a wide variety of investors. An excellent white paper on private placement programs and trade platforms was written by MB Assets of Memphis, TN–a copy of which is available for download above. It should be noted that we have no relationship with MB Assets or its principals—their white paper is provided for educational purposes only and should not be construed as an endorsement of the firm.Part of the confusion regarding private placement programs in particular is the term, “private placement”. Private placements are used by companies to raise capital from private investors often via a set of investment documents known as a Private Placement Memorandum (PPM).
Prime Bank Programs
More often than not, when people refer to PPPs they are referring to what are more properly known as Prime Bank Programs. Prime Bank Programs, also known as Prime Bank Investments, High Yield Investment Programs (HYIPs), Buy-Sell Programs or Roll Programs, are clearly and universally fraudulent. They purport to involve the purchase and sale of medium-term notes (MTNs), Standby Letters of Credit (SBLCs), Bank Guarantees (BGs), or some similar instrument.
As the name implies, it is usually alleged that only the largest top-50 prime banks in the world are involved in this program and participation is by invitation only. There is usually a great deal of secrecy involved and the minimum investment is typically in excess of $100 million or more. Interestingly enough, prime bank programs in the US often state that only overseas banks are involved while overseas programs often state that only US banks are involved.
They are most often described as “risk-free” investments where one prime bank issues discounted instruments to a purchaser at another prime bank who has committed to purchase the notes at an agreed-upon price. If this is simply a bank-to-bank transaction one might wonder where the scam comes in. Supposedly, the purchasing bank needs a large deposit from a new client to create the line of credit that will be used for the purchase. This deposit will be placed in a “blocked” account and held untouched by the bank until the transaction has been completed.
Prime bank programs have been universally condemned by the FBI, SEC and US Treasury Department as being fraudulent. In recent years, fraudsters have attempted to circumvent these governmental warnings with a clever ruse. They state that these agencies know that the programs are real, but that they are obligated to publicly deny their existence lest investors transfer large amounts of capital from deposit accounts into prime bank programs. Supposedly, this mass exodus of capital would cause the banking system to collapse, hence the official denials. This, of course, is complete nonsense.
Medium Term Notes (MTNs), Standby Letters of Credit (SBLCs) and Bank Guarantees (BGs)
Part of the reasons such frauds have been successful is that Medium Term Notes, Bank Guarantees and Standby Letters of Credit are real financial instruments. A Medium Term Note is the general name given to a debt instrument that matures in the medium term, typically 5-10 years. Bank Guarantees, as they are known outside the US, or their US counterpart, Standby Letters of Credit, are most often used in interational commerce where a seller might be unsure about a buyer’s ability to pay for goods once received. One way of overcoming this impasse is to utilize a bank guarantee or standby letter of credit.
A SBLC or BG is simply a promise to pay on the part of the bank involved in the transaction. Trading partners often have greater confidence in a transaction if the payment is backed by a commercial bank rather than a trading partner with whom they might be unfamiliar. Banks are not in the business of losing depositors’ money, so in order for them to issue a SBLC or BG in the first place, they would underwrite the SBLC/BG similar to an unsecured loan–meaning obtaining an SBLC/BG is a difficult endeavor to begin with.
Moreover, banks will often charge 1%-8% of the face value of the instrument, meaning a $100 million SBLC could cost the bank’s client as much as $8 million to obtain, and is usually only valid for a period of one year. Which, of course, begs the question: if the borrower has sufficient standing with the bank to be approved for an SBLC/BG and sufficient funds to cover the cost of issuing it, why are they contacting us? The answer is, if this were a legitimate transaction, they wouldn’t be.
Over the years many people have approached us looking for SBLCs/BGs. Most are actually looking to LEASE an SBLC/BG and use the instrument as collateral for a loan or cash investment. This is somewhat akin to leasing a new car and then trying to use the car as collateral for a loan from another lender. No automobile, SBLC, BG or any other leased asset can be used as collateral in a legitimate financial transaction, which is why these transactions never work.