On August 4, 2014, the SEC issued an Investor Alert citing 10 Red Flags that should give investors an indication that an unregistered offering may be a scam. If you are considering an investment in an unregistered offering or you are advising a client who is considering such an offering, you should consider the following Red Flags.
1. Claims of High Returns with Little or No Risk. Any offering, registered or unregistered, has risk. Investors should be suspicious of any offer that claims it has no risk.
2. Unregistered Investment Professional. Investors should be wary if sales are being made by people who are not registered and licensed to sell securities, even if they know the person personally.
3. Aggressive Sales Tactics. If the investment is pitched as a “once-in-a-lifetime” opportunity or you or your client is pressured to invest quickly without taking the time to research the investment, caution should be exercised.
4. Problems with Sales Documents. Failure to provide sales documents, such as a private placement memorandum, or provision of sloppy sales documents that contain typographical, spelling or other errors, are Red Flags.
5. No Net Worth or Income Requirements. In some cases, sales of unregistered securities may only be made to “accredited investors” – investors with over $200,000 (or $300,000 with his or her spouse) in income in the last two years and the expectation of the same level of income in the current year or investors with a net worth, exclusive of home, of at least $1,000,000. If the offering doesn’t contain income or net worth requirements, skepticism may be warranted.
6. No One Else Seems to be Involved. Care should be taken if others, such as attorneys, accountants, brokerage firms or other third parties, are not involved in the offering or if the investor is told not to contact someone who is supposedly involved with the offering.
7. Sham or Virtual Offices. The investor should verify that the company has an actual operating or physical presence in the state in which it says it is doing business.
8. Company Not in Good Standing. The investor should check the applicable state office, usually the state Secretary of State, to make sure the company actually exists and is in good standing under the laws of the state in which it purports to be organized.
9. Unsolicited Investment Offers. The SEC advises that an unsolicited offer may be a sign that the investment is a scam even if the offer is from a friend, trusted co-worker or family member. People engaging in a fraud often exploit the trust that exists in groups of people (“affinity fraud”). An investor should be particularly wary if he or she is told to keep the possible investment confidential or a secret.
10. Suspicious or Unverifiable Biographies of Managers or Promoters. An investor should independently verify the claims of experience the management or promoters claim to have by asking for references and doing an Internet search. Additionally, an investor should be concerned if an honest promoter has no relevant experience.
A careful review of these Red Flags might be just what is needed to prevent an expensive mistake.
