If you regularly invest in a portfolio, whether for retirement or as part of a financial plan, you need to scrutinize your choices. Some investments may not turn out as expected.
You need to know the risks and keep your antennae up for anything that seems suspicious. While the Internet has improved life and communications, it has also increased the possibility of getting scammed.
Take the following steps to prevent getting involved in an investment that, at first, appears enticing, but, in the end, gets you into a financial jam.
- Confirm the Registration of the Investment
Investments should be registered with the Securities and Exchange Commission (SEC) or a state regulatory agency. Otherwise, you should be highly suspicious. The SEC’s rulings are based on a law passed in 1933 that is called the Securities Act.
What the Law Says about Public Disclosure
The 1933 Securities Act, serves two primary goals:
- That investment information for securities featured for sale is available; and
- That the sale of securities is performed transparently without the goal to mislead.
The SEC ensures these legal mandates are met by requiring that companies provide full disclosure of their securities through registration.
Reviewing Public Disclosures
As an investor, you can read through a company’s SEC registration details to decide on securities and investments with objectivity. By first confirming a company’s security is SEC-registered, you can consider company information that includes the following:
- A review of the business’s operations and assets.
- A definition of the security offered in the marketplace.
- Details about the company executives.
- Certified financial statements, including income statements and balance sheets backed by independent professional accountants.
A company’s prospectus and its registration details are made public after the business files its information with the SEC. Whether a company is a U.S.-based or foreign entity, it must register and provide the forms to the SEC.
Speaking to an Investment Fraud Attorney
As an investor, you can go online and review the information through the SEC’s computer information system known as EDGAR. Access to the information is free, so you should definitely review a security investment by these means.
You can also talk to an investment fraud attorney as they can enlighten you on the registration process. For example, some securities are exempted from registration, and may include:
- Private offerings directed to a restricted number of institutions or individuals
- Offerings of a certain size
- Government securities related to state, federal, and municipal projects
- Intrastate investments
The SEC exempts registration for smaller offerings to increase capital and reduce the costs associated with trading securities.
What to Keep in Mind
When you do read a company’s prospectus, keep in mind that the SEC does not assess the investment as good or bad. Instead, registration is based on a company’s compliance with disclosure. SEC rules stipulate that companies provide honest and accurate details. However, the agency cannot guarantee the information the company provides.
If a business neglects to provide important details, you have it in your right to seek recovery for your losses. You can do this if you can show that the disclosure failed to reveal, with completeness and accuracy, certain points in its submission.
- Beware of Quick-Rich Investments
A fraudster knows how to reel someone into a deceptive plan. A quick-rich, too-good-to-be-true investment is something you should view suspiciously. The promise of high and fast returns is an anomaly. All investments carry risk and therefore are not guaranteed.
- Don’t Fall for a High-Pressure Sales Tactic
Don’t choose an investment where you feel pressed to act. This is a tactic a scammer uses to get you too quickly part with our cash. Any legitimate business will allow you to make an informed decision and take your time in deciding.
- Don’t Respond to an Unsolicited Offer
If someone sends you an email or calls you about a “once-in-a-lifetime” investment, you should quickly turn the other way. There are plenty of investment options available online that you can choose for yourself.
- Request the Company’s Offering Circular
Before you decide on an investment, ask the company for its offering circular. Don’t invest in any security or similar investment until you have information about it in writing and you can do some research.
- Discuss Your Choice with an Attorney or an Accountant
Before you invest, discuss your choice with an attorney or an accountant, who can provide you with objective suggestions or advice.
- Take a Skeptical View of Online Investment Opportunities
Today, online channels, such as social media, may advertise investment opportunities. Research these opportunities first before you spend money.
- Familiarize Yourself with the Different Investment Schemes
You can review the various schemes swindlers use to con investors. The SEC and Investor.gov list the various forms of fraud used against investors. Below are some examples
Pump and Dump Investments
One scheme, called pump-and-dump, promotes the investment in a stock with the promise of a high return. After the promotion and hype abate, the schemers sell their shares, which causes the price to plummet and a resulting loss.
Pre-IPO Investment Opportunities
Also, keep an eye out for promoters of pre-IPO shares, as the SEC regularly receives complaints about these investments. Pre-IPO funds are used to invest in companies that wish to eventually list their holdings on the stock exchange.
You should not invest in a pre-IPO, even if it has received favorable reviews until you get more details. Do your research or ask an attorney before you invest, as a company with an unproven record of performance can quickly lead to a financial upset.
Ponzi Investment Schemes
The Ponzi investment scheme is one of the oldest cons in the investment world. However, this tactic makes its organizers billions of dollars per year. That is because the scheme promises a quick and fast high return on contributions and typically regular payments. The idea is to hook and rook investors by making them believe they will receive big profits from what they invest.
Instead, the organizer of the plan pays the initial investors the money new investors add. In the end, the fraudster is the one who receives the biggest gain, as they never really invest the money for the plan.
Do Your Homework Before You Invest
Do your homework before you spend money on an investment. Knowledge is indeed power when you are trading or making investment choices.