Get facts right before buying unlisted shares
Be very careful of claims that you can make more money by investing in unlisted shares than you can in shares listed on a recognised stock exchange.
And if you are advised to invest in unlisted shares, make sure the advice is based on a thorough due diligence of the investment.
This is the costly lesson an oncologist practising in Pretoria and Sandton learnt when he agreed to switch his investment in listed shares in Netcare for shares in an unlisted mining company. Since buying R1.3m worth of shares in Unimin African Resources in 2012, the doctor has been unable thus far to recover his money.
A recent determination by Naresh Tulsie, the ombud for financial services providers or FAIS ombud, will enable him to recover R800 000 of his investment from Sunet Coetzer, the adviser who assisted him to switch the shares.
At the time that the doctor invested, Netcare was trading at about R14 a share. The shares are now worth more than R27. He lost not only some of the capital he invested but also the opportunity to almost double his money to date in these shares.
Coetzer runs a tracing agency and had contacted the doctor to advise him about "unclaimed" shares in Old Mutual, Sanlam and Netcare, according to the ombud's determination. The doctor told the ombud he knew about the shares, but was persuaded to switch the Netcare ones because Coetzer told him he could earn a higher yield in the unlisted mining company.
The doctor told the ombud he was under the impression he invested in preference shares listed on the Frankfurt Stock Exchange that could, after a year, be exchanged for shares in a private equity (unlisted) company based in London called Global Precious Commodities. (Preference shareholders get the first bite of profits by way of dividends and in the event of bankruptcy have greater rights to a payout than ordinary shareholders).
Two years after investing the doctor unsuccessfully asked for his money back. He then found out that Unimin did not have mining rights, a problem with the preference share structure resulted in them being ordinary shares only, irregularities had prevented Unimin from listing on a stock market and Global Precious Commodities was no longer a going concern.
Coetzer told the ombud she merely traced shareholders and if they wanted to sell their shares referred them to PSG Konsult's brokerage. She admitted she discussed the Unimin investment with the doctor but said she could not advise him on it and he should do his own research.
She denied saying Unimin was listed and said the doctor fully understood the risks of the unlisted investment.
Coetzer also said a court had subsequently ordered Unimin to repay its shareholders and therefore the doctor had failed to show he had lost his money.
However, the ombud said Coetzer had provided the doctor with what appeared to be a standard document covering share transactions bearing the name Downstream Trading and her financial services provider licence number (advisers must be licensed by the Financial Conduct Services Authority or work for an entity that is licensed).
This document stated that the doctor had been "fully advised" about the purchase of shares, understood the risks and that the shares could be listed or unlisted. Tulsie said the document proved Coetzer did contract with the doctor to give him advice but in doing so she failed to abide by the code of conduct under the Financial Advisory and Intermediary Services Act.
She failed to give the doctor material information to enable him to make an informed decision, the ombud's ruling says. She also failed to show him the differences between the investment in Netcare and that in Unimin and she failed to check if the investment was suitable for his needs, he says.