Blind Spots Abound: The Risks of Investing in Emerging Industries
Welcome to the February 2020 edition of our newsletter! In this issue, we’ll examine the risks present when investing in new, often under-regulated industries.
New Technology, New Promise, New Risk?
The first two decades of this century have proven to be a hotbed of innovation, as everything from smartphones or voice-controlled assistants has moved from the realm of science fiction to an everyday reality many take for granted. The pace of innovation has not slowed, and in fact changes to rules concerning access to public market investor capital have spurred the growth of several nascent industries. But with this rapid innovation has arisen new opportunities for fraud.
Whether promoting cannabis oil as a medicinal cure-all or all-electric vehicles that save money and the environment, how new technologies come to market, and who is behind them, is as important as the promise they represent, if not more so. In states where medical marijuana has been legalized, for example, legitimate dispensaries exist in the same space as companies that operate outside of the state permit process, likely also evading other regulations and standards in the process. For a potential lender or investor, the risks are several: Is the other party seeking to operate a truly legitimate business? What are their capabilities? In addition to those standard types of due diligence queries, new industries pose additional risks. If making a collateralized loan, for instance, where inventories are pledged as collateral, what can be done to adequately monitor that collateral in an industry that continues to have significant grey and black-market operations?
Other industries also pose risks, as we saw with a wave of solar panel installation companies defaulting in the last decade. As new technologies come to market, investors are well served to focus on the people behind the product, and to understand their reputation and, by extension, their likelihood of long-term success. Thorough due diligence efforts, including the inspection, documentation and occasional surveillance of any loan collateral, are key to a successful investment, as is a thorough understanding of the evolving regulations around many of these fledgling industries. Paired with research to better understand the people behind a project, an investor or other business partner can make a more informed choice.