Dealing with Problematic Investors

Written by Rachel Cappell - Director, Rita Shires - Controller, and Lisa Randall - Controller

Addressing Issues Created by Problematic Investors

Problematic investors can create regulatory, compliance, reputational, and financial issues for a company, and can include institutional investors (private equity or VC funds, family offices, foreign wealth funds) or high net worth individuals.  What can companies do to assess and address these issues in consideration of their capital requirements?

What Makes an Investor Problematic?

Problematic investors can present a range of challenges to your company. Issues could include a lack of financial sophistication or past involvement in failed ventures or products.  Furthermore, other issues that can also lead to concerns include the use of questionable financial practices, a history of regulatory non-compliance resulting in fines and injunctions, or contact with questionable entities, such as problematic foreign governments.  

A current example includes Russian investors caught in the sanctions imposed in the wake of the war in Ukraine.  Additional examples include organizations or people connected to governments with a history of corruption, human rights issues, and financial problems, such as China, Mexico, and some governments in the Middle East. 

The broad world of cryptocurrencies may also be seen as problematic given the shifting regulatory landscape of this space and its recent history of fraud and theft. Companies are especially vulnerable if conducting transactions in cryptocurrencies. The crypto space is an under-regulated financial product by design. The lack of regulations makes it especially attractive and susceptible to problematic market participants. 

Before engaging with any investor that might be problematic, companies must look closely at their own financial controls, assess their risk appetite, and research the legal and regulatory implications of doing business with them.

Know Your Investors

To prevent financial crimes and adhere to anti-money laundering rules, banks are subject to regulatory requirements to know their customers (“KYC”, or “Know Your Customer” rules). They have created defined processes that follow a linear path where every affiliate, investor and client is thoroughly vetted and evaluated against specific criteria. However, not all companies and industries are so strictly regulated, and many must come up with their own procedures on how to address these issues. 

The first thing companies must do is understand who comprises their population of investors and investor affiliates. Then they must systematically assess this population. Once a company determines its goals, concerns, and risk appetite, it can then determine the kinds of controls that need to be put into place. 

Conducting background checks is one of the strongest controls available at a company’s disposal to vet and research an investor. A full background check can involve credit checks, checks against databases of the Financial Industry Regulatory Authority (FINRA), the Office of Foreign Assets Control (OFAC), law enforcement lists of financial crimes, violations of the Security and Exchange Commission (SEC), and any industry-specific regulators who could bring charges or claims against companies. These criteria can also include additional review through a variety of national and international standards, depending on the nature and footprint of the company’s business. In short, don’t ever fully rely on a company’s assurances without corroboration.  Just like an investor does its due diligence on your company, you should be learning just as much about the investor.

Determine Your Strategy

What do you do after you’ve done your due diligence and found you have a problematic investor?

The company should assess its risk appetite and determine the risk it’s exposed to by working with this investor. Sometimes it’s merely a matter of following the law. Companies should refrain from working with certain individuals or enterprises because they pose a high risk of being involved in illegal activities, such as money laundering. While some companies may continue working with problematic investors for various reasons, others may need to create a new strategy for their capital plan. This may include dropping these investors and considering different sources of capital.

Eventus Can Help

Eventus helps clients avoid common pitfalls and we can guide you in determining if your investors, as well as your customers, are sound and reliable. We can help your company assess its risk concentrations and understand the impact they can have on your business model. 

Additionally, we look at our clients’ capital structure and explore alternative solutions to find different sources of funding. 

In the crypto sector, Eventus provides insight into the use of blockchain, and offers companies an understanding of the risks inherent in using crypto as part of their asset mix or in payments, as compared to traditional forms of currency. 

For regulatory and compliance issues around crypto, we draw upon our relationships with various specialty firms to help clients ascertain their risk appetite and present scenarios of how regulators will react to certain circumstances.

Finally, with our broad industry experience, our technical expertise in financial management, and our strong business partnerships, Eventus provides the latest industry guidance on valuation, accounting, financial reporting, disclosure, and establishing appropriate control procedures. 


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