In May 2011, The Financial Industry Regulatory Authority (FINRA) issued an investor alert on stock-based loan programs, noting that they can have potential risk concerns. We at Equities First agree with FINRA on the importance of our clients being aware of the details of our stock lending process and the potential consequences. Unlike some of our competitors, Equities First is dedicated to providing an in-depth loan agreement, and reviewing it with borrowers so that they are aware of what can happen during the process.
Below are some questions FINRA recommended investors ask, as well as our answers.
1. What happens to my stock once I pledge it as collateral?
Once an investor pledges his or her collateral, the assets are transferred to one of Equities First's global custodial accounts. For the loan term period, Equities First owns the collateral and has the authority to trade the stock, which in turn enables Equities First to offer lower-than-market interest rates and higher LTV ratios to its clients. At the end of the term, Equities First returns the equivalent number of shares to the investor.
During the loan term, Equities First provides statements every quarter that summarize the interest charge and any dividends to which the shares are entitled. The investor has the additional option to request the current valuation of his or her pledged agreement at any time during the loan term. For more information regarding how Equities First holds and returns stock that has been loaned, please see Jeff Smith's blog here, Managing Director at Equities First. (include hyperlink to "How Equities First holds and returns stock to borrowers" blog. )
Many of our clients choose a stock-based loan over other financing options due to the tax advantages. However, each loan situation is unique, and we recommend that all our clients speak with their tax advisors regarding any tax consequences.
2. What benefit does the promoter receive for recommending the program?
Most clients come to Equities First through a financial intermediary, either a financial advisor, attorney, or broker. If a broker refers Equities First to a prospective client, they are eligible for financial compensation. In our ten-year history, we have not mass advertised and instead relied on such brokers to promote our program. As you will see in the "Results" page of our website, available here, many of our clients have become repeat users.
Equities First is referred both by brokers and individuals who have completed transactions with us.
3. Does the lender have audited financials?
FINRA recommended potential investors to ask this question in order to assess the potential strength of the lender, and determine if it was capable of returning the pledged collateral back to the investor. As with any private company, audited financial statements are unavailable to the public, primarily for competitive reasons. However, here are some facts I can share with you:
1) In Equities First's ten-year history, we have always funded on time and returned the pledged collateral to the investor.
2) Equities First has completed over 600 successful loans in both the United States and international markets.
3) The completed transactions had loan amounts that ranged from $100,000 to $10,000,000.