As promised last week, we are going to take a closer look at each of the schemes identified in the Top 10 Investor Traps of 2009. Today we start by looking at entertainment investments.
These unregistered investments, encompassing a variety of products including movies, infomercials, internet gambling and pornography sites, promise high returns while offering little disclosure of risk. How exactly do these work? While each scam can be executed in any number of ways, it is likely to unfold something like this:
A film production company calls and tells you that it is raising funds to produce a new film. It will be cutting edge, but low-budget, with well known actors who believe strongly in the script and are willing to sacrifice their usual high salaries for the sake of art.
You are told that similar films have generated 5 to 1 returns for investors, and even that the producers or directors involved have won awards at prestigious film festivals. Because the demand for independent movies is on the rise, you are “guaranteed” to make your money back. According to their promises, your investment will be spent on production and distribution.
This could unfold many ways. It could simply be an investment fraud – there is no film at all, merely a scheme to get your hard-earned money. Or it could be somewhat more complicated.
In some cases, the same people pitching you on the telephone are the “producers” and “screenwriters.” Most of the money goes into their pockets, and they produce a low-quality film that is never released and makes no money. This may not be investment fraud, but certainly is a poor investment.
Of course, movies are being made everywhere, everyday. You may be given the opportunity to invest in a legitimate film. In this case, you have to consider the risks involved. Rule of thumb in Hollywood is that 75% of films never break even (as someone with friends in the industry, this estimate seems absurdly high). Of the 25% that do, few will ever make enough money to pay you back the kind of return most entertainment investment schemes promise you. Make sure you are aware of this, and willing to accept it.
With any new investment opportunity, always take the time to do a little research. It is the least you can do to avoid investment fraud. Be sure that the investment offered matches with your goals and your risk tolerance. Investments such as this are risky – can you afford to lose that money?
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