Information Memorandum’s are becoming more popular as a way to raise money from investors.
But before you start investing you need to be aware of a couple of things.
First, they are normally aimed at larger investors, which are described as professional and sophisticated investors as they do not attract the same sort of disclosure requirements as an ordinary investor. If you are classified as a sophisticated investor you are deemed able to make sensible investments decisions as such you are not afforded the same level of protection as an ordinary investor.
Second, they generally ask for a large amount such as $500,000 as the minimum investment you can make, this is also a way to get around having the Information Memorandum reviewed by the ASIC. As the document is not checked by any government department or the ASIC it is a case of “Buyer Beware” as there is no way to know if the information in the documents is factual or simply made up. All investigation needs to be done by the investor before making the investment. If something goes wrong then you have no one to complain to and will need to undertake any legal action at your own costs.
The provider of the Information Memorandum will not provide you any advice and will not take into consideration your financial position or risk profile. What you normally receive is some glossy documents containing information about the investment. Basically a sale document, if you speak to the manager they will only provide general advice about the investment which is another way of saying you will receive a “Sales Pitch”.
So, should you invest in these investments?
Generally my advice is no. Unless you get a qualified person to review the investment and fully explain the risks and see if it meet your investment goals. This, of course, will cost money to get the advice, but it could save you half a million dollars.
If you receive an Information Memorandum, what should you do?
1. Did you request a copy or was it unsolicited and simple sent straight to you. If unsolicited then the manager has already breached your privacy, which is not a good start.
2. Did you receive a follow-up call from an unsolicited approach? If so it would indicate to me that the investment is not popular as the manager is now cold calling people. Good investments sell themselves they do not need someone to cold call.
3. Look at who the investment manager is and what they have done previously. However, be careful as mentioned above the ASIC has not checked the document as such there is no guarantee that the manager’s experience is correct. If their experience is not correct, you will pay the price.
4. Take a look at the investment strategy, if any history of performance has been provided or if any expect projections have been provided. If no history or projections on performance AVOID the investment at all costs.
5. Look at the fees. Are they high? Is there a performance fee? If so what is, the performance benched marked against. I have seen an IM, which take 20% of all upside. So, no matter what the return, the investment manager gets 20%.
If there is no clear investment strategy, high fees, high-performance fees against no index, cold calling and subjective information regards experience AVOID. There are plenty of other investment opportunities.