March 30, 2012

My Two Cents on Impact: Why the Prospectus is my Friend

This past weekend I decided to spend some quality time reading the prospectuses of my two chosen impact investments, which I described in my last blog post. The sizable PDFs, found next to each investment on MicroPlace, summarize in great detail the terms of the investment, how/where it will be allocated, organizational and financial information about the issuer, and pages upon pages of risks (and risk management practices) associated with purchasing Notes, or investment offerings, from the issuer. If you're not used to reading stuff like this — which I certainly am not — brace yourself. It's like reading a contract: you have to sludge through it, even if it hurts. I recommend getting comfortable in your favorite reading spot and having a bottle of wine handy.

I wanted to share a few pieces of important information from my Oikocredit-USA prospectus, because I wouldn't have anticipated some of the issues it addresses, so I imagine other people might not either. I believe it's best to avoid major surprises when it comes to my money, which is why I propose that the prospectus is my friend.
  • Allocation of my investment: The Oikocredit-USA prospectus gives a general statement of how my investment will be allocated: to a lending institution or group of lending institutions selected by Oikocredit-USA from a portfolio of about 879 project partners in more than 70 countries. This threw me off, since I had allocated my investment specifically to women in Haiti via Sevis Finansye Fonkoze, so I called MicroPlace to double check. I confirmed that my money is indeed going to Haiti. The reason for the blanket statement is that Oikocredit-USA's prospectus covers all of its Notes on MicroPlace.
  • Increasing my investment: If I decide to increase the amount of my investment in an existing Note, I can't. I'll have to purchase additional Notes for the same project, given that the Note is still available.
  • Withdrawing my investment: I will get emails from Oikocredit-USA prior to the maturity of my investment with instructions on cashing out or reinvesting. If I don't act on this information — which, unfortunately, I'm likely to do — Oikocredit-USA will automatically reinvest my principal.* When I finally realize what has happened and decide to withdraw the new investment before maturity — because I had intended to cash out to pay for a trip to Europe, let's say— I'll be penalized, if I'm allowed to do it at all. This is true of all withdrawals before maturity, although some issuers give you 90 days to pull out of an automatic reinvestment without any penalties.
  • Taxes: Even though Oikocredit-USA is a nonprofit and the purchase of one of its Notes might feel charitable, it's not, so there are no tax deductions. On the contrary, interest earned on these investments — just like on most traditional investments — is taxable, so I'll be receiving a Form 1099 at the end of each year reporting interest earned on my MicroPlace investments.
  • Default: My investment is not insured or otherwise protected in any way, so if, for whatever reason, Oikocredit-USA experiences losses, it would first tap its reserves of approximately $1.04 million to repay investors, and then. . . who knows? Oikocredit-USA has about $22.2 million in Notes outstanding, so there's no guarantee that I'd be part of the lucky few who get repaid if something goes awry. That's the picture painted by the prospectus, at least, which presents worst-case scenarios. In reality, the organization has more than $25 million in total assets — according to the financial stateemnt in its prospectus — so that would likely cover all potential losses.
(From the Oikocredit-USA prospectus)

There was consistent reinforcement throughout the prospectus that there can be no assurance that I will not lose all or a part of the principal amount and interest on my Notes. This is because if an Oikocredit-USA borrower — a microfinance institution (MFI) in a developing community that it serves, for instance — defaults on a loan because a person they've made a loan to defaults on theirs, there's pretty much nothing Oikocredit-USA can do. Plus, there are political and economic risks associated with doing business in developing countries that could affect the organization's ability to repay investors. This is unsettling, but I have to trust Oikocredit-USA's track record (average yearly write-offs of below 1% of its financing portfolio) and MicroPlace's due diligence process in selecting it as an issuer.

I spoke with MicroPlace's head of due diligence, Flavia Romero, about the process of allowing new issuers on the site and was quite impressed (and relieved!) by the rigorous vetting process. It takes three to nine months and involves MicroPlace staff, PayPal analysts and eBay legal, enterprise risk management, and audit experts. The team reviews each issuer's operations, financials, management team, IT capabilities, processes, procedures, and the MFIs they lend to before allowing them on the site. After the initial audit, the team conducts quarterly and annual reviews. So far, no MicroPlace issuer has defaulted on any of its loans, which is a good sign.

What the Oikocredit-USA prospectus didn't cover in great detail is specifics about its own due diligence process (is there a limit on how much interest its MFIs are allowed to charge borrowers?) and the social impact of the MFIs it loans to, especially the one I'm investing in: Sevis Finansye Fonkoze. I want more details, so in my next blog post, I'll take a closer look at the conditions on the ground in a couple of the countries where MicroPlace investors are targeting their funds.


--Lonnie Shekhtman
Lonnie is not an employee of MicroPlace and is paid by MicroPlace to produce her blog series.

*MicroPlace actually allows its investors to opt out of automatic reinvestments. The option is in each investor's account settings. Click here to learn more.

2 comments:

  1. Great research and writing! Thank you!

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    1. Thanks for the comment and thanks for reading! --Lonnie

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