Technology at the Speed of Thought: How New Frontiers Can Increase Fraud

Welcome to the May 2018 edition of our newsletter!  In this issue, we’ll examine how rapidly evolving technologies present new investment opportunities – and chances for fraud.

The Limitless Potential of Invention and Desire for Gains May Not Always Mix

In many ways, we are currently experiencing an age of technological advancement that may, upon reflection, rival the industrial revolution of centuries ago.  New companies are tackling daunting problems, such as curing cancer, which creates an opportunity for life-saving drugs or therapies to come to market.  Other companies are perfecting environmentally safe, potentially driverless cars.  These types of advances, once considered science fiction, are increasingly becoming part of everyday life.

Many of the companies fueling this progress are not large, well established conglomerates, although some are pushing those more well-known companies to innovate.  Instead, these are often privately held companies, or ones raising capital in public markets via newer methods we’ve discussed before, like “mini-IPOs” and methods of crowdfunding.  Old norms of transparency for newly public offerings won’t evaporate altogether, but they are being changed as regulators balance creating greater access to capital while maintaining investor and consumer protections.

Late Homework is Unacceptable: Researching Risky New Ventures

The shifting regulatory landscape has placed more of the information gathering component on investors and their advisers.  Recently, certain executives of companies promising great medical advancements have been charged with massive “years long” frauds which could serve as a clarion call for increased vigilance.   While not every investor, no matter how great their net worth, would hire an expert to evaluate a company’s claims, due diligence on new technologies should include a thorough analysis in industry journals not only of the company and its reputation but also challenges facing whatever niche or market the company is trying to enter.  Did regulators elsewhere try to block that technology, and if so, why?  Could existing intellectual property holders make a case for infringement at some point?  More fundamentally, do the claims made in private placement memoranda and other offering materials make sense and seem feasible?  Evaluating the individuals involved is key as well, since many such companies rely on founder-driven corporate cultures for much of their early life cycle.  By doing the necessary research you can protect clients from investing in a too-good-to-be-true fraud and help them identify the legitimate companies that could empower a generation of improvements.