By Terry Tu, Senior Consultant of Formosan Brothers Attorneys-at-Law, NY Bar

Even under poor performance of the stock market, the hedge fund established by the former chairman of the Nasdaq Stock Exchange, Bernie Madoff, still yielded stable returns (1 to 2% per month). It was in fact a “Ponzi scheme.” He utilized the investment capital of the later investors as the investment income of the earlier investors, and continued to issue “stable profits.” Eventually, the fraudulent scheme was revealed due to global financial crisis. If this is the truth behind the so-called “stable profits,” for non-professional investors who are lack knowledge of overseas financial products and their distributors, there may be traps hidden behind those overseas funds that advertise high return on investment (ROI).

       We often see those who claim to be asset management companies, international consulting companies, or fund platforms, selling offshore funds or brand funds through telemarketing or online marketing, with sales pitch claiming to yield higher ROI than the general market. Such fund distributor companies or platforms convene briefing sessions to meet with investors directly or use multi-level marketing to sell offshore funds. However, with the well-designed product brochures, fine seminar venues, and high yield rates for offshore funds shown on their website, are the investors ignoring the fact that such companies are selling offshore funds unlawfully?!

‍

Risk #1: Shell company or company without special permit to sell offshore funds

Offshore fund distributor companies or platforms may not have registered in any countries/jurisdictions. Even if they are registered, they may not have obtained the special permit to sell offshore funds in Taiwan and are outside the Financial Supervisory Commission’s supervision. Circumstances such as managers embezzling money, forging statements, or reporting fraudulent yields to defraud investors may occur.

‍

Risk #2: Orders not actually placed or shell funds

Illegitimate fund distributor companies or platforms may not actually place orders with an overseas property management company, or they may sell brand funds of their own, which are shell funds.

‍

Risk #3: No transparency

Illegitimate fund distributor companies or platforms may not publish their fund information periodically like legitimate fund distributor companies, resulting in their investors having incomplete or incorrect products information and the risks involved and therefore making wrong investment decisions. Moreover, the non-transparency or intentional concealing of information by the fund distributor companies often leads to the investors not understanding the fee structure involved and their calculations. The investors may find out about the high fees or other charges only after they sell the funds.

‍

Risk #4: In the event of disputes, judicial means is the only remedy, and time-consuming

For investors who purchased offshore funds from illegitimate fund distributor companies or platforms, they will not be protected by securities-related laws and regulations in the event of disputes. They may only seek judicial remedies based on a contractual relationship or through investigation. However, such procedures still need to go through the investigation, prosecution, and court proceedings, which may drag on for a long period.

To distribute offshore funds in Taiwan, one needs to obtain a special permit from competent authorities. An offshore fund issuing institution also needs to appoint a master agent in Taiwan for the offering and the distribution and sale of the offshore funds. Institutions that may be appointed as a distributor in Taiwan are limited to securities investment trust companies, investment consultancy companies, securities firms (brokers), banks, trust companies and other institutions approved by the competent authority. Even if the fund selling institution has the name of an investment company, a financial or corporate management consulting company, an asset management company and is legally registered with the Ministry of Economic Affairs, it is still engaging in unlawful offering and  sale of offshore funds as long as such a company does not obtain a special permit from the Financial Supervisory Commission. Investors may refer to the company names to determine preliminarily if such a company is a lawfully regulated  fund distributor company.

‍

In addition, prior to purchasing, investors may visit the FUNDCLEAR website (https://announce.fundclear.com.tw/MOPSFundWeb/) to inquire whether an offshore fund distributor company is legitimate, for its basic information, and whether the funds they are interested in have been approved and registered so as to protect their investment interests and avoid potential traps.

(This article was published in the Commercial Time’s Experts Commentary Column https://view.ctee.com.tw/monetary/25131.html )

‍