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Cape Town - If investors, especially novice investors, take one lesson away from the Garek and Wealth 4 U debacles it must be: Do not buy shares in an unlisted company if you cannot access audited financial statements for that company.
On Tuesday, Fin24.com broke the news that ambitious West Coast diamond miner Wealth 4 U Mining & Exploration (W4U) had been placed into final liquidation, and that a long-awaited Department of Trade & Industry investigation into the mysterious Garek, had made shock findings around the pan-African conglomerate's lack of corporate governance.
In both the W4U and Garek cases, shareholders did not have access to audited financial statements. Yet these shareholders pitched money into the ventures on assumptions based solely on unsubstantiated hype: usually about how fantastic returns from these ventures would flow in ensuing years.
It would seem that with both W4U and Garek, investors were lured into making investments by promises of a value-enhancing listing on the JSE or other international bourses. The gist of the listing ploy is that investors are offered unlisted shares at bargain level; the kind of never-to-be-repeated offer that will transform into huge wealth when the shares are listed at much higher levels. It's a ploy oft-repeated in small unlisted companies.
A typical example will be that investors who buy shares at 100c will be able to sell their shares at a listing price of 400c a few months later.
The truth is that very few unlisted venture capital companies actually list, mostly because these companies simply would not qualify for a listing on a reputable stock exchange. Still, the myth exists amongst novice investors that a listing is the elixir for unlocking huge amounts of value. Blinded by the promise of wealth, pesky details like tangible assets, cash flows and liabilities are overlooked.
No matter what is being punted about possible listings values, it is grossly irresponsible to buy shares - and even more irresponsible to peddle shares to the public - without being able to quantify the underlying value of the shares.
If shares in an unlisted company are offered at 100c/share, a potential investor needs to understand exactly how that 100c in value is determined.
W4U
In the case of W4U - which at last count had around 120 million issued shares - the enterprise value of the company would have been R120m based on the last issued share price of 100c/share. W4U went further by suggesting that its shares held an internal value of 260c/share, meaning the directors reckoned the company was worth over R300m.
Perhaps a glance at W4U's audited financial statements could have blasted that value myth to bits. But W4U never issued audited financial statements for its 2007 or 2008 financial years, although the company had the gall to ask shareholders to accept unaudited numbers at the 2007 annual general meeting.
Comments by the liquidator of W4U that the company's assets were worth around R7m (mainly in the form of rusting boats and mining equipment) underlines the importance of relying on audited numbers rather than directors' opinions when valuing an unlisted investment proposition.
Garek
In the case of Garek - which one must remember punted itself as a Pan African industrial powerhouse - the lack of audited financial statements certainly helped create an atmosphere where the company's prime movers could weave a mythical corporate tapestry.
On paper, Garek may have looked impressive, even imposing, to novice investors. The sprawling structure suggested a conglomerate with a multitude of local and offshore interests. But the reality, is that Garek was involved in a strenuous shuffling of paper with the main source of cash flow coming from investors. That's the import of the DTI's report, a finding long-suspected by Fin24.com and its sister print publication Finweek.
If Garek had presented audited financial statements, it would have been difficult to hide the flow of cash, particularly since the DTI's report alleges that large commissions were paid on share sales and that monies raised from selling shares were not always invested in the entities that sold shares. It would have also been difficult to disguise the fact that Garek's subsidiaries were not generating meaningful cash flows.
The bottom line is that shareholders in Garek, which raised a not insubstantial sum of R74m from shares sales in various corporate guises, and W4U had, to all intents and purposes, lost their investments.
What remains truly amazing is that investors remain hell bent on backing such wild and woolly ventures in the hope of getting rich quick despite a surfeit of sceptical articles and warnings to investors in Finweek and Fin24.com over the last six years.
Finweek first raised questions on an entithy called RSI, a forerunner of Garek, in 2002 and later that same year ran a cover story questioning the robustness of Matric, another forerunner of Garek.
One can only presume that the prime movers behind Garek and W4U were supreme salesmen, individuals skilled enough to placate jittery investors who might have become aware of the prevailing media scepticism around these unlisted investment projects.
What of SunAir Holdings?
At this time, Finweek and Fin24.com is trying to delve into the affairs of another unlisted company, SunAir Holdings, which claims to be listing on the Frankfurt Stock Exchange in early July. To date, we have been unsuccessful in obtaining audited financial statements from SunAir, which has been operating - without actually flying - for a number of years now.
Some may argue that as SunAir has not taken to the skies there won't be much to glean from audited financials. Hardly! Audited financials will allow shareholders and prospective investors to gauge how SunAir has been funded and by whom. They will ultimately provide insight into whether a little known crowd from Milnerton in Cape Town has the wherewithal to undertake the task of operating an international airline.
Ironically, at the time of writing the Garek and W4U reports, Fin24.com received a call from a SunAir shareholder mulling an offer to buy more shares in the company.
To those SunAir shareholders and potential investors we can only repeat: Do not buy shares in an unlisted company if you cannot access audited financial statements for that company.
- Fin24.com
