Will Someone in Our Industry Please Tell Kim Kardashian How Private Placements Are Supposed to Work?

You can call her a Leonardo da Vinci -- or perhaps the entrepreneur extraordinaire, with passions as a reality show star, perfumer, clothier and even sex video diva. But this time, Kim Kardashian's antics are turning her into a poster child for redefining the rules governing private equity investments.

The Kardashian family's net worth is estimated at nearly $80 million, but even experts on how the rich think are shaking their heads over diva daughter Kim's current shenanigans.

Kim amassed about half the family fortune after six years of reality TV, $25,000-a-Tweet "sponsored" twittering and 7-figure sex tape settlements.

Now she’s on the market news circuit pushing the penny stock she and her sisters have granted the worldwide license to make cosmetics in their name -- and the stock’s dismal performance has tongues wagging.

“From reality TV stars to professional athletes to entertainers, many have tried and failed to recreate themselves as entrepreneurs,” says April Rudin, who runs an eponymous high-net-worth marketing group.

“Kim Kardashian isn’t Warren Buffett.”

Protected from risk or locked out of returns?

Rudin is using Kim’s misadventures to highlight the fact that the SEC still considers wealth the best indicator of market sophistication.

It’s not so much that she feels that the Kardashians need to be protected from their mistakes, but this locks most street-level types out of private placements, pre-IPO stocks and similar “accredited investor only” opportunities.

Few would accuse Kim of being sophisticated in the ways of esoteric investments. Even the publicly traded stock she got involved with hasn’t exactly been a gold mine.

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It started trading at 55 cents a share back in July and now it’s down at $0.21, taking 60% of investors’ capital with it.

Maybe some day it’ll be a blockbuster, but as yet the company’s own auditors are worried that it might not be around a year from now.

If so, it would be another strike on the nominally “sophisticated” Kardashians’ hit-or-miss business record.

The sisters experimented with a branded debit card a few years ago, only to pull it off the market one step ahead of the regulators after signing barely 250 accounts.

They got out of the following $75 million breach of contract lawsuit with only incidental losses, but few would consider the venture anything but an embarrassment.

Their nominally sophisticated partners went bust.

Easy come, easy go

It’s more likely that any lack of sophistication on the Kardashians’ part revolves around managing the cash that’s already flowing from their TV shows and endorsement deals.

The family has been earning a reported $20 million to $65 million a year for awhile now, but split so many ways it can’t cover too many $10 million mansions, much less a true billionaire lifestyle for anyone.

Gossip columnists are anything but financially sophisticated -- point in favor of the SEC keeping the velvet rope up around exotic investments -- so estimates of what the family is worth often get confused with how much they’re bringing in.

The best informed guess I’ve seen for the Kardashians’ true collective net worth is about $80 million, which would normally mean they’ve been able to bank a reasonable chunk of their earnings and live off the returns.

But the girls aren’t exactly starting from zero. High-powered entertainment lawyer Robert Kardashian left his wife and kids a rumored $100 million estate in trust when he died almost a decade ago, so it’s not like they had to build that entire fortune on their own.

Unless the Kardashians are worth a lot more than that now, they might actually be spending even more than the stratospheric amounts they’re earning.

Kim’s failed 72-day-marriage to basketball star Kris Humphreys, for example, cost $10 million and attracted close to $18 million in endorsements.

Once the divorce was finalized and Kris got his share of that money -- but nothing else, thanks to a Hollywood-tight prenup -- the Kardashians’ mother/manager swears that at best Kim broke even on the event.

Now she’s buying new boyfriend Kanye West $750,000 Lamborghinis for his birthday, even though the rap star is reportedly worth more than her entire family combined.

Right now Kardashian fever is still hot, but that single romantic gesture still cost more than what Kim earns in a whole season of her reality TV show.

If they break up, her new boyfriend will want his own wheels. And if they stick together, what will she get Kanye next year?

Either way, it's the kind of thing a rich person might do, but not exactly a sign of financial sophistication.

No Warren Buffett, but that’s not her job

The fact that Warren Buffett himself has practically no idea who Kim Kardashian is tells you everything you need to know.

Nobody really expected a 31-year-old socialite to be a market genius. Presumably she has people to manage the money for her, and to be honest, so do most SEC accredited investors.

Ultimately the SEC standard of “sophistication” really means that either you can prove you know what you’re doing or you have enough of a safety cushion that one dumb deal won’t bankrupt you.

As a celebrity, Kim’s actually done all right on that cosmetic company. It paid her and her sisters close to $1 million up front just to get up and running in their names.

But unless investors have a truly “sophisticated” view of how much the stock is really worth, it may not be so bad if the SEC makes them jump through a few extra hoops to get their taste.

And it could always be worse. The video game company that’s been trying to ride the fame of Snooki from Jersey Shore has seen its shares crater 90% since the start of the year.

Clearly celebrity investments, like millionaire investors, weren’t all created equal. Some will be smarter than others.

Teaching the rest how private placements and other "sophisticated" instruments work is where advisors -- generally poorer, generally wiser -- come in and earn their fee.

Scott Martin, senior editor, The Trust Advisor


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