Case Study: Fyre Festival - Why Private Investments Can Be So Risky

US Attorney Charges Fyre Festival Founder Billy McFarland with Fraud

The House Is On Fyre

Billy McFarland, the founder of the infamous Fyre Festival, was arrested and charged with wire fraud in a scheme to defraud two investors for $1.2 million in private investments in two companies (Fyre Media and Fyre Festival LLC) controlled by McFarland.

 

US Attorney Joon Kim stated,

 

“McFarland promised a 'life changing' music festival but in actuality delivered a disaster. McFarland allegedly presented fake documents to induce investors to put over a million dollars into his company and the fiasco called the Fyre Festival.”

 

Read that again: he presented fake documents to induce investors. What exactly did he fake?

We Have Tons of Revenue, Trust Me

According to the allegations in the complaint and documents provided by the victims, McFarland grossly exaggerated the revenues and number of artist bookings of Fyre Media and Fyre Festival LLC in order to induce two victims to invest $1,200,000.

 

The PPM (private placement memorandum - the document provided with details of the investment) for investment with Fyre Media stated that “thousands of offers representing tens of millions of dollars of performances and appearances have been made and accepted with Fyre.”

 

The PPM then provided an income statement which showed millions in revenue derived solely from thousands of artist bookings. The investor asked for further evidence of bookings and revenue so McFarland emailed the investor a spreadsheet of fictitious bookings of artists to induce him to invest.

 

In reality, McFarland’s company was not booking thousands and making millions of dollars, it had 60 bookings and earned $57,443 for the entire period. You think he would have invested $700,000 if those numbers had been accurately disclosed?

 

So not only did McFarland allegedly misrepresent revenues and bookings, but he provided a fake document to further his lies. Astonishing.

I Guarantee It

But there’s more! The investment in McFarland’s company included a revenue share agreement with either a 120% return on investment or 5% of revenues from the Fye Festival, whichever was greater. This return was guaranteed in its entirety by stock that McFarland owned. McFarland included a copy of his Scottrade account statement as an addendum to the revenue share agreement which purported that McFarland owned $2,565,079.18 in stock.

 

In reality, McFarland’s stock was only worth $1,499.68. He altered the account statement to show he had millions.

Mindset of the Investor

Put yourself in the mind of this investor NOT knowing that all of the financial information is false. You have a company that’s making millions of dollars with thousands of celebrity and artist bookings in a short amount of time. The company has a charismatic owner telling you how huge Fyre Festival is going to be and backing it up with a personal guarantee of his more than $2 million in stock.

 

You then see Kendall Jenner, Bella Hadid, Emily Ratajkowski, and all the other social media influencers1 (another topic for another day) posting sexy videos and pics, telling you how awesome and celebrity-filled this festival in the Bahamas is going to be:

And you get 5% of all the revenues of the festival? Maybe you would make the investment too.

Informed Investment Decision

The SEC's published an Investor Bulletin on private investments which states, "It is important for you to obtain all the information that you need to make an informed investment decision."

 

Private investments do not have the comprehensive disclosure requirements of registered investments. How are you going to know what’s real and fake? In this scenario, it’s possible that you would have identified the forged account statement or the fake spreadsheet after speaking to an employee at Fyre Media. But the question you have to ask is: “how can I verify that the information being provided is accurate?”

 

If you cannot verify the information through other sources then the risk of this investment becomes incredibly high because you’re trusting information provided to you by someone who is looking at you for one reason: your money.

 

This is not meant to dissuade you from making a private investment in a company. We've all heard success stories. This is meant for you to think critically and skeptically with the investments that are put in front of you. 

Footnotes

1 - Jenner was reportedly paid $250,000 for one post to promote Fye Festival while the 400 others were all paid at least $20,000. No one except Emily Ratajkowski disclosed they were compensated for this pitch, a violation of Federal Trade Commission guidelines. So how well has that “guideline” worked in policing social media? Just open Instagram.