The North American Securities Administrators Association’s annual list of top threats that can trap unsuspecting investors includes two new threats facing small-business owners under the JOBS Act.
The top 10 list also includes two new threats for investors.
In releasing the annual list, NASAA’s new president, Ohio Securities Commissioner Andrea Seidt, said that with the rollout of rules required by the JOBS Act, “investors and small-business owners alike must be on heightened alert for questionable investment offers and services.”
Seidt said NASAA members were concerned that the recent lifting of an 80-year-old ban on the advertising of private offerings, mandated by the JOBS Act, would lead to greater abuse by unscrupulous promoters.
The implementation of the JOBS Act also has created opportunities for unregulated third parties to provide ancillary services. “Whether a crowdfunding portal or an accredited investor aggregator, it is important to do your due diligence and to understand that use of an unregulated third party to provide such services does not change your obligations under federal and state securities laws,” Seidt said. “Investors are not alone in their potential to be scammed. Using a fraudulent portal means both the business and the investor stand to lose.”
The following is NASAA’s list of the top 10 financial products and practices — in three categories — that threaten to trap unwary investors and small-business owners:
Persistent Investor Threats
Private Offerings: Fraudulent private placement offerings continue to rank as the most common product or scheme leading to investigations and enforcement actions by state securities regulators. These offerings commonly are referred to as Reg D/Rule 506 offerings, named for 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. While Reg D/Rule 506 offerings are used by many legitimate companies to raise capital, they carry high risk and may not be suitable for many individual investors. With the passage of the JOBS Act and recent adoption of rules implementing certain aspects of the Act, restrictions on how Reg D/Rule 506 offerings can be marketed to the general public have been relaxed, including the lifting of an 80-year ban on general solicitations (advertising).
Real Estate Investment Schemes: The popularity of investments involving distressed real estate continues throughout the boom and bust cycle in the U.S. housing market. Even as housing prices continue to recover in many U.S. markets, investors should be aware that schemes related to new real estate development projects or buying, renovating, flipping or pooling distressed properties are popular with con artists. In the latest NASAA enforcement survey, real estate investments were the second-most common product leading to securities fraud investigations by state securities regulators.
High-Yield Investment and Ponzi Schemes: Retail investors chasing yield often fall prey to high-yield investment and Ponzi schemes promising unbelievably high rates of returns. That trend does not appear to be going away any time soon. As with other alternative investments, high yield means higher risk, and these types of alternative investments are favorites of scam artists. Whether a typical Ponzi scheme or a high-yield investment program, many of the characteristics are the same — promise of incredibly high return coupled with low risk; a reasonably plausible explanation of why the investment is so good; a scam artist with credibility often based on claims of holding false credentials or being part of a particular group or organization. Initial investors are paid a return and help spread the word by promoting the investment to others. Ultimately the scam will collapse, leaving later investors with nothing to show for their trust in the scheme.