State securities regulators will be busy policing new and emerging scams in the new year.
The North American Securities Administrators Association has just released its annual survey of state securities regulators’ top five current investment practices, products or schemes they’ve encountered over the past year as well as what they see as “emerging” threats in the coming year.
NASAA conducted the survey in the spring and summer of 2017.
“In today’s ongoing environment of low interest rates, the lure of high-interest-bearing promissory notes continues to tempt investors, especially seniors and others living on a fixed income,” said Joseph Borg, NASAA president and Alabama Securities Commission Director, in releasing the findings.
Read on to see the top five threats as well as three emerging threats identified by securities regulators from 50 U.S. jurisdictions:
1. Promissory Notes
Seventy-four percent of regulators identified promissory notes as among their leading sources of complaints or investigations.
Used generally by companies to raise capital, legitimate promissory notes are marketed and sold almost exclusively to sophisticated or corporate investors with the resources to research the companies issuing the notes and to determine whether the issuers have the capacity to pay the promised interest and principal.
Promissory notes may require registration as securities with federal and state securities regulators.
“Average investors should be cautious about offers of promissory notes with a duration of nine months or less, which in some circumstances do not require registration,” Borg said. “Short-term notes that appear to be exempt from securities registration have been the source of most — though not all — of the fraudulent activity involving promissory notes identified by regulators.”
State securities regulators reported 138 formal enforcement actions involving promissory notes in 2016.
2. Real Estate and Ponzi/Pyramid Schemes
Tying for second place were frauds related to real estate or Ponzi schemes, with 54% of state securities regulators identifying both as the second-most frequent source of current complaints or investigations.
Real estate scams are “a perennial investor trap,” according to NASAA. State securities regulators caution investors about real estate investment seminars, especially those marketed aggressively as an alternative to more traditional retirement planning strategies involving stocks, bonds and mutual funds. Attendees at these seminars may hear testimonials from people claiming to have doubled or tripled their income through seemingly simple real estate investments. But these claims may be nothing more than hot air. Two of the most popular investment pitches involve so-called “hard-money lending” and “property flipping.”
State securities regulators reported 100 formal enforcement actions in 2016 involving real estate investments.
3. Oil and Gas Investments
Oil and gas-related investments or interests were the third most cited source of complaints or investigations, identified by 50% of regulators.
Fraudulent oil and gas deals may be structured with a legal entity (such as a limited partnership) registered in one state but with operations and physical presence in a second state. Prospective investors in the venture may be solicited from still more states (with the obvious benefit to the perpetrators being a reduced chance an investor will ever seek to visit a well site or the organization’s headquarters).