Top 10 Investor Threats of 2012 and How To Avoid Them
Published on September 4, 2012
The North American Securities Administrators Association (NASAA) publishes an annual list of financial products and practices that threaten to trap unwary investors. This year’s list has been broken into two parts: new threats and persistent (or old) threats.
- Crowdfunding and Internet Offers: The 2012 JOBS (Jumpstart Our Business Startups) Act makes significant changes to the methods startup businesses and entrepreneurs may employ to bring their ventures to the investing market, and investors must be wary of the attendant risks.
- Inappropriate Advice or Practices from Investment Advisors: Investment advisors are licensed to give specific investment advice and owe their clients a fiduciary duty, unlike brokers that may merely effect suitable securities transactions for their clients. The regulatory environment for investment advisors is shifting, and has led to increased scrutiny from both state regulators and the Securities and Exchange Commission (SEC).
- Scam Artists Using Self-Directed IRAs to Mask Fraud: State securities regulators have investigated numerous cases where a self-directed IRA was used in an attempt to lend credibility to a bogus venture. Fraud promoters pushing a Ponzi scheme or other investment fraud can misrepresent the responsibilities of self-directed IRA custodians to deceive investors into believing that their investments are legitimate or protected against losses. While a scam artist may suggest that self-directed IRA custodians analyze and validate investments, those custodians only hold the assets in a self-directed IRA and generally do not evaluate the quality or legitimacy of any investment.
- EB-5 Investment-for-Visa Schemes: The Immigrant Investor Program, also known as EB-5, is an immigration program linked to job creation that is growing in popularity; investors must beware of promoters who falsely claim that an investment in their venture is safer or guaranteed due to an influx of foreign cash.
Old, Persistent Threats:
- Gold and Precious Metals: Often, scams begin with an unsolicited communication such as an email or telephone call offering to sell investors gold coins, bullion, bars, or other forms of the precious metal that the promoter will hold in safekeeping for the investor. Far too often, the gold simply does not exist. Increases in the value of precious metals during the recession have led unwary consumers to believe that the value will perpetually increase. Like any risky investment, there are no guarantees.
- Risky Oil and Gas Drilling Programs: Unfortunately, energy investments often prove to be a poor substitute for traditional retirement planning. Investments in oil and gas drilling programs typically involve a high degree of risk and are suitable only for investors who can bear the loss of the entirety of their principal. Moreover, some promoters will conceal these risks, using high- pressure sales tactics and deceptive marketing practices to peddle worthless investments in oil wells to the investing public.
- Promissory Notes: Investors must be wary of promises of security and liquidity in these promissory notes, which are very often false or overstated. Investments of this nature are highly speculative and the risk of total loss of the funds invested is high.
- Real Estate Investment Schemes: While legitimate real estate investments can be an important component of a diversified portfolio, investors should be aware that schemes related to buying, renovating, flipping, or pooling distressed properties also are popular with con artists. In a recent survey of the states, real estate fraud was ranked as the third most common product or practice leading to investigations and enforcement actions.
- Regulation D Rule 506 Private Offerings: In the most recent survey of state securities regulators, fraudulent private placement offerings were ranked as the most common product or scheme leading to investigations and enforcement actions. These offerings also are commonly referred to as Regulation D Rule 506 offerings (the exemption in federal securities laws that allows private placements to be sold to investors without registration). By definition, these are limited investment offerings that are highly illiquid, generally lack transparency, and have little regulatory oversight.
- Unlicensed Salesman Giving Liquidation Recommendations: Insurance agents who are not also licensed securities professionals do not have the training and have not demonstrated the expertise necessary to determine the suitability of liquidating securities products to fund the purchase of an insurance product. A specific license is required before anyone can recommend the purchase or sale of securities. Being licensed as an insurance agent is not a substitute for a securities license. Investors should demand to see proof that a salesperson is licensed to make a recommendation to sell securities before agreeing to any transaction involving securities.
It’s important to note that this list is not exhaustive and investors are subject to several other types of fraud out there. This is why it’s imperative to do your due diligence before committing to any investment. In addition to knowing the source of the investment, research and fully understand any asset before you invest.
For tips on how to protect yourself and what to look for, check out Next Generation’s “Investor Awareness Resources” section. For more details on the different types of investment fraud mentioned, check out NASAA’s entire list here.Back to Blog