The investment marketplace remains a dangerous place for unwary seniors and their advisors. To help everyone stay safe, the North American Securities Administrators Association has released its annual list of products that threaten to trap investors. The list includes both traditional threats and those that are emerging.

“A con artist will use every trick in the book to take advantage of unsuspecting investors, including exploiting well-intended laws, in order to fatten their wallets,” said Jack E. Herstein, NASAA President and Assistant Director of the Nebraska Department of Banking & Finance, Bureau of Securities.

According to NASAA, several emerging threats include:

  • Crowdfunding and internet offers
  • Scam artists using self-directed IRAs to mask fraud
  • EB-5 investment-for-Visa schemes

Let’s take a closer look.

Crowdfunding and internet offers. The 2012 JOBS 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 underlying risks. Also, many more rules and mechanisms must be put into place for those changes to actually take effect. For example, the relaxed rules governing registration of relatively small securities deals, public solicitation for private funds and disclosure of information to investors over the Internet are not yet written. Furthermore, the JOBS Act provisions related to crowdfunding, a much-publicized method for startups seeking capital, are not yet available to legitimate businesses — and will not be until sometime in 2013. Even when the relaxed rules and registration exemptions are effective, they will not make investments in small businesses less risky — just more prevalent. And the JOBS Act provisions do not eliminate fraud, an unfortunate common feature of Internet securities activity.

Scam artists using self-directed IRAs to mask fraud. Scam artists are using self-directed IRAs to increase the appeal of their fraudulent schemes. 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.

Fraudsters also exploit the tax-deferred characteristics of self-directed IRAs, and know that the financial penalty for early withdrawal may cause investors to be more passive or to keep funds in a fraudulent scheme longer than those who invest through other means. Self-directed IRAs also allow investors to hold alternative investments such as real estate, mortgages, tax liens, precious metals and private placement securities; financial and other information necessary to make a prudent investment decision may not be as readily available for these alternative investments. While self-directed IRAs can be a legitimate way to hold retirement assets, investors should be mindful of potential fraudulent schemes when considering investments for their self-directed IRA. Custodians and trustees of self-directed IRAs may have limited duties to investors, and generally will not evaluate the quality or legitimacy of an investment or its promoters.

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. However, 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. The EB-5 immigration category is a 20-year-old program that grants a U.S. visa to foreign nationals who invest a minimum of $500,000 into a new commercial enterprise. This job-creation effort has attracted investors from around the world, and as with any investment approach, increased interest has been accompanied with new risks. All investments with an EB-5 component are subject to traditional securities laws, and investors need to be alert to the foreign-funding feature.

Unscrupulous promoters may seek to prop up the plausibility of their scheme by highlighting a connection with a federal jobs program. Similarly, investors may be intrigued by the prospect of big funding from investors in China or other foreign countries with traditional or growing economic power.

Also included in NASAA’s list were the following persistent threats:

  • Gold and precious metals
  • Risky oil and gas drilling programs
  • Promissory notes
  • Real estate investment schemes
  • Reg D/Rule 506 private offerings
  • Unlicensed salesmen giving liquidation recommendations

For information about specific investor traps in your region, contact your state securities regulator.

For more from Harry Lew, see:

Caveat Emptor, 14 Ways to Check Out Your Vendors

The SEC Brings the Hammer to Rogue Advisors

Avoiding the Dementia Trap