10 Red Flags that an Unregistered Offering May Be a Scam

Since it’s back-to-school day for my community, I thought I would go back to the basics.

The SEC’s Office of Investor Education and Advocacy 2014 Investor Alert identifies potentially fraudulent unregistered offerings with features that indicate a problem. The alert goes through 10 red flags for you to note about private placements.

Private placements are not inherently problematic. Recently, more money has been raised through private placements than through IPOs and secondary offerings.

But scammers are going to use a private placement, where there is no established market for the sale of the investment offering. You don’t have liquidity.

For me, two of the ten really stand out as the most problematic.

1. Claims of High Returns with Little or No Risk

The basics of investing are that you get a better expected return for more expected risk and a lesser expected return for a lesser expected risk. A private placement already has more risk. You don’t have liquidity. There is no market to sell your investment.

If the proposed investment is such a good deal on risk/return basis why are they offering it to you?

5. No Net Worth or Income Requirements 

The federal securities laws generally limit private securities offerings to accredited investors.  Be highly suspicious of anyone who offers you private investment opportunities without asking about your net worth or income.

An individual is considered an accredited investor, if he or she:

(a) earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year,
OR
(b) has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence or any loans secured by the residence (up to the value of the residence)).

If you’re not an accredited investor, the federal securities laws say that you shouldn’t be allowed in invest in a private placement.

Here are the other eight red flags:

2. Unregistered Investment Professionals
3. Aggressive Sales Tactics
4. Problems with Sales Documents
6. No One Else Seems to be Involved
7. Sham or Virtual Offices
8. Not in Good Standing
9. Unsolicited Investment Offers
10.  Suspicious or Unverifiable Biographies of Managers or Promoters

Sources:

• Investor Alert: 10 Red Flags that an Unregistered Offering May Be a Scam