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US SEC: How to check if an unregistered investment offering may be a SCAM

https://www.investor.gov/news-alerts/investor-alerts/investor-alert-10-red-flags-unregistered-offering-may-be-scamThe Securities and Exchange Commission’s Office of Investor Education and Advocacy issued this Investor Alert on 4 August 2014 to help investors identify potentially fraudulent unregistered offerings.
The SEC recommend that if you are presented with an opportunity to invest in an unregistered offering, in addition to thoroughly researching an investment—and the investment professional selling it— you should be on the lookout for these common signs of potential fraud.

1. Claims of high returns with little or no risk

Promises of high returns, with little or no risk, are classic warning signs of fraud.  Every investment carries some degree of risk, and the potential for greater returns comes with greater risk.  You should be skeptical of any investment that is said to have no risks.

2. Unregistered investment professionals

Unregistered persons who sell securities perpetrate many of the securities frauds that target retail investors.  Always check whether the person offering to sell you an investment is registered and properly licensed, even if you know him or her personally.  An investment professional’s registration, background and qualifications are available through the Investment Adviser Public Disclosure website and FINRA’s BrokerCheck. 

3. Aggressive sales tactics

Scam artists often pitch an investment as a “once-in-a-lifetime” offer to create a false sense of urgency.  Resist the pressure to invest quickly and take the time you need to investigate thoroughly before sending money or signing any agreements.  Any reputable investment professional or promoter will let investors take their time to do research and will not pressure for an immediate decision.

4. Problems with sales documents

Avoid an investment if the salesperson will not provide you with anything in writing.  A legitimate private offering will usually be described in a private placement memorandum, or PPM.  Similarly, sloppy offering documents that contain typographical, spelling, or other errors can be a red flag that the investment could be a scam.

5. No net worth or income requirements

The federal securities laws limit many private securities offerings to accredited investors.  Be highly suspicious of anyone who offers you private investment opportunities without asking about your net worth or income.

6. No one else seems to be involved

Be cautious if no one besides the salesperson appears to be involved in the deal. Usually, brokerage firms, accountants, law firms, or other third parties are involved in a private offering.  Similarly, be cautious if you are told not to contact someone who is supposedly involved with the investment. 

7. Sham or virtual offices

A company may establish a mailing address within a state in which it has no legitimate operations in a fraudulent attempt to qualify for an exemption from registration.  If the company’s corporate address is a mail drop and you are unable to verify that the company has any actual operating presence (such as a headquarters building, plant or other physical operations) within the same state, be wary. 

8. Not in good standing

Any company, including limited liability companies and limited partnerships, seeking your investment should be listed as active or in good standing in the state where it was incorporated or formed.  Every company must file and pay annual taxes in order to maintain its good standing.  Each state, usually under the offices of its Secretary of State, maintains a publicly accessible online database of its companies.  You should be wary if the company you are being asked to invest in can’t be found in the records of the state it claims to have been formed in or if it’s not listed as active or in good standing. 

9. Unsolicited investment offers

You should be very careful when you receive an unsolicited – meaning you did not ask for it – investment offer.  Whether from a total stranger or from a friend, trusted co-worker, or even family member, always consider the motivation of the person offering the investment.  Fraudsters often exploit the trust and friendship that exist in groups of people who have something in common, sometimes called affinity fraud.  You should be especially suspicious if you are told to keep the investment opportunity confidential or a secret.

10. Suspicious or unverifiable biographies of managers or promoters

To appear legitimate, fraudsters may represent that they have had a successful career in the relevant industry when nothing could be further from the truth.  Don’t just take the promoter’s word on his or her background.  Try to independently verify any claims, including by asking for references or conducting a simple Internet search.  On the other hand, even if the promoter is truthful about his or her background, if the promoter appears to lack relevant experience, consider this a red flag as well.

This checklist, which was developed by the SEC (see full checklist here), also listed what investors can do to protect themselves, including: check the background of the investment professional, understand the risks involved in investments, and always ask questions.

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