The business plan to make millions and not sweat about it

THE investment bank that led the initial public offering (IPO) of Snap, a technology company that provides solutions for mobile messaging, has downgraded the stock just four months after its listing

An analyst from Morgan Stanley in a note to clients stated that Snap’s advertisement products were not evolving as quickly as expected, and faced intense competition from Facebook-owned Instagram.

The influential investment advisory firm had been wrong in assessing the potential of Snap that led to its high-profile listing in March this year, raising US$3.4bil in the process.

Snap was positioned as a stock that would garner a lion’s share of advertising spending. It was supposed to steal the thunder from the likes of Instagram and many other messaging apps.

Now, even the investment bank that had promoted the stock has conceded that it had over-estimated Snap’s ability to innovate and live up to its billing.

Snap, like many other technology companies, offered promises of big potential windfalls. It did not have a large asset base to anchor the lofty valuations of the company. All that it offered was a business model with a subscriber base. Even that subscriber base can fizzle out fast if the tech company does not innovate and appeal to users.

By the mere promise of a potential windfall in the future, it managed to raise US$3.4bil. The exercise enriched the promoters, irrespective of whether they have sold their shares or not.

The promoters have a vibrant market that would price the value of their equity. They are worth millions, if not billions – a quantum that would vary depending on the future performance of Snap.

In contrast, the poor shareholders would be staring at losses. The Snap shares were offered at US$17 each. It went as high as US$29.44. Morgan Stanley has cut its valuation to US$16, below the IPO price.

To recoup their losses, shareholders can only hope that the management of Snap innovates and comes up with a solution that would enhance earnings and win advertisement dollars. They have to wait, and wait with hope.

The other option is to cut their losses and walk away from the company.

In Malaysia, we do not have tech companies that can fetch valuations running into the billions.

However, we do have “entrepreneurs” making money by just setting up an RM2 company that offers promises of lofty returns on investments.

These firms that call themselves investment companies are owned and managed by promoters who offer financial returns that everyone with a sane mind would agree is not sustainable.

All the promoters need to do is come up with an investment plan that generates healthy returns. It must be a plan that should look good on paper. It does not have to be tested in the real market place.

The plan can involve investments in gold or coins or foreign exchange (forex). To gain credence, the promoter needs to show that the value of the core product in the investment scheme is rising. They need to show that others have made money from investing in gold or forex.

For instance, if the investment is based on gold, then the price of gold should be on the uptrend. If it is based on forex, then there must be volatility in the exchange rate. If it is based on coins, then the rising value of bitcoin becomes the basis to promote investments in the scheme.

The promoter would then need to gather some funds for the next stage of the plan – which is to roll out the scheme with a promise of monthly returns.

When it comes to this stage, some capital is required. But the promoters are well aware that the money can be recouped manifold, depending on how long the scheme runs before the authorities step in.

In almost all cases, hundreds if not thousands tend to put their money with these firms on the promise of the monthly returns.

The promoters behind companies such as Genneva Malaysia Sdn Bhd have been charged with illegal deposit taking and money laundering to the tune of RM12bil. The MBI Group in Penang has funds totalling RM177mil frozen, while JJPTR, another company offering hefty returns on investments, has said that US$400mil was missing from its account due to “hacking”.

When the scheme fails, the authorities step in. Bank Negara seizes the bulk of the money and whatever assets held by the investment scheme.

The promoters are remanded – some for a few days and many for up to 14 days. After the remand period is over, the promoters are free to lead their lives while waiting for the case to be heard in court. They would face charges of money laundering or illegal deposit taking, cases that are not so easy to prove.

The irony is nobody can put a finger on how much money was collected from the scheme. In almost all cases so far, the amount collected from investors are far more than what the authorities seize.

The accounts cannot reconcile. Depositors are left with only a hope that the authorities would be able to trace the missing money and return it to them.

How does the listing of Snap that took some US$3.4bil of public money differ from the many unauthorised investment schemes that offer lofty returns to their investors?

In both cases, the promoters are richer by millions by just offering promises of a potential windfall.

However, in the case of Snap, the promoters sweated to build an app that investors were willing to bet on.

Also, in the case of Snap, the investors do have an exit option. They can sell their shares in the market, pick up the losses and carry on with their lives.

However, for those who put their money into unauthorised investment schemes, they have almost nothing to hang on to, except to be comforted with the monthly returns that they have received before the collapse of the scheme. The chances of getting back their capital is almost nil.

Meanwhile, the promoters walk free after spending a few weeks behind bars while waiting for the case to be heard.

They are richer by hundreds of millions for devising a scheme that offered only promises of a windfall. And they probably lost no sweat over it.

This easy way of making millions will not stop unless those who are found guilty are handed severe punishment.