DUE DILIGENCE – WHAT IS IT?

When one hears the words due diligence many think of highly technical questions one must ask, or they must have a high knowledge and understanding of investments. Nothing could be further from the truth.

Actually, due diligence is using your common sense. It is just general questions that everyone should ask before investing in any program, no matter who is offering it. So let’€™s break it down.

When you are asked to invest into any program, if it is a legal program (meaning licensed and registered with the proper authorities) they must provide you a prospectus. Don’™t let that word scare you. Prospectus just means it is a written document that outlines the investment, the risks involved, who is offering the product, their address, contact information, fund manager, the mission of the fund (what it is about), some projections, history of like-minded investments, and a projected return on investment. They are very long, can be very boring, and in many instances over the investor’€™s head due to all the legal issues that must be disclosed.

Now that is the technical side of due diligence. Now let’€™s examine the really simple things you can do and have performed enough due diligence to ensure you are investing in a legal investment.

  1. Who is the company offering the investment?
  2. What is their address, phone number, fax number, and E-mail?
  3. Who do they show as the contact person (customer service), as well as their phone and E-mail, should you need assistance or if something goes wrong?
  4. What are their hours of operation (is customer service only during a specific time frame, or is it 24 hours)?
  5. If a program is being offered only through the Internet does not in itself make it fraudulent. What you must know is this: They must comply with all the rules 1-4 above. If you see high return with little or no risk, that is an immediate red flag. Also if they say they are doing business offshore, want to keep below the radar of law enforcement agencies, the program is a special program for a select few, or only the wealthy know about this type of investment; these are all major red flags.
  6. Many will claim they are private programs, thus do not have to be registered. This is not totally true. A Private Investment does not have to be registered with the authorities, BUT they are limited to no more than 100 total investors. All other investment products have to be licensed and registered in every jurisdiction in which it is being offered for sale. No matter where in the world it is. Another red flag.
  7. If they say the word “€œguaranteed”€ return is another red flag. You cannot guarantee an investment return except for CD’€™s, Money Market accounts or Bonds/Bond funds. Even these are for very specific periods of time.
  8. Check for audited financial statements by a CPA firm, and the name of the CPA firm is shown with their contact information.
  9. Many times they count on the hype and emotion of the moment for you to throw all common sense out the window and invest now. Remember: If it is that good of an investment now, it will still be just as good next week or next month, or next year. Do not be pressured into investing without having the time to check it out
  10. Ask your accountant or attorney about the investment. If you have neither, then talk to a securities broker about it. They will answer your questions, and you don’€™t have to be a client for them to do so. Many will gladly offer help, as they realize you just might become a client of theirs if they do help you. Don’€™t be intimidated into not asking others for guidance or assistance.
  11. Make sure you fully understand what it is you are investing in. Do not be pressured into investing if your questions have not been answered. If you start feeling like you are being given the run around, it is a major red flag or another warning signal.
  12. Never, ever invest more than you can afford to lose, no matter how much due diligence you have done. Real investments can and do lose money. There are no guarantees in an investment of always making money or a return on your investment other than CD’€™s, Money Market Account or Bonds/Bond Funds.
  13. If a prospectus states returns are generated from the buying and selling of companies, leasing contracts, etc., make sure they list the names of the companies that were bought and sold or leasing contracts. If the specific names are missing, this is another major red flag.
  14. When a company that operates solely on the internet tries to deflect any negativity of their program, one method is to bring up Enron or World Com as examples of people losing their money to “€œlegal”€ companies. This is another red flag. What happened to Enron and World Com has nothing to do with them or their legality.

As you can see basic due diligence is not that hard to do, but if you follow these steps, they will save you from being taken or scammed out of your money. Now that you know what simple due diligence is you won’€™t be intimidated anymore on how to do it. If you are still unsure, don’€™t be afraid to ask.