Warning Issued In NC About Investment Schemes

RALEIGH, N.C.-- Spring is just around the corner and regardless of the season, there's always someone with a scheme hoping to take your money.

Last week, North Carolina's Secretary of State Elaine Marshall issued a warning for consumers to be aware swindlers, especially when it comes to investments. "Unfortunately, there are real crooks out there trying to pretend they are cupids with sweetheart investment deals. But their real goal is to swindle the investing public," Secretary Marshall said.

In a news release, Secretary Marshall said she is particularly

concerned this year about the recent lifting of an 80-year-old ban on the advertising of private offerings, mandated by the federal JOBS Act. "Lifting the ban opens the door to greater abuse by unscrupulous promoters," Marshall said.

She reminded investors that the Secretary of State's Division of Securities can provide background information about those who sell securities or give investment advice, and about the products being offered. "You wouldn't trust your health to an unlicensed doctor, so why jeopardize your financial health by trusting your money to an unlicensed broker or investment adviser?" Marshall said. "You should all check with us about the person offering you an investment before you transfer any funds into it."

Here are the Top 10 financial products and practices that threaten to trap unwary investors and small business owners during 2014 as compiled by the North American Securities Administrators Association of which the N.C. Secretary of State's Office is a member:

1. Private Offerings: These offerings commonly are referred to as Reg D/Rule 506 offerings, named for the federal exemption that allows private placements to be sold to investors without registration. These are limited investment offerings that have little regulatory oversight. While Reg D/Rule 506 offerings are used by many legitimate companies to raise capital, they carry high risks. 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. Investors soon will begin to see advertisements for private placement offerings, even though only a very small percentage of the population will be eligible to invest. Scam artists are likely to use this legally permissible avenue of outreach to their advantage.

2. Real Estate Investment Schemes: 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. While legitimate real estate investments can be an important part of an investment portfolio, there are substantial risks with many types of real estate investments. As with all investments, careful vetting and due diligence is a must with real estate investments.

3. Ponzi Schemes: Small retail investors are the people most likely to encounter Ponzi schemes promising unbelievably high rates of return. 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. 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.

4. Affinity Fraud: Scamming members of an identifiable group continues to be one of the most often used forms of Ponzi schemes. Fraudsters know that people tend to trust someone who appears to share common interests or backgrounds as themselves. The most commonly exploited are the elderly, religious and ethnic groups. People often find it hard to believe that "one of their own" could be scamming them. Consequently, cases of affinity fraud can go unreported for long periods of time. Investors should keep in mind that investment decisions should be made solely on the merits of the offer and not on similarities they may share with the promoter.

5. Scam Artists Using Self-Directed IRAs to Mask Fraud: Scam artists can use self-directed individual retirement accounts (IRAs) to increase the appeal of their fraudulent schemes. While self-directed IRAs can be a safe way to invest retirement funds, investors should be mindful of potential fraudulent schemes when considering a self-directed IRA. Custodians and trustees of self-directed IRAs may have limited duties to investors, and may not evaluate the quality or legitimacy of a given investment. Fraud promoters pushing a Ponzi scheme or other investment fraud can misrepresent the duties of self-directed IRA custodians in order to trick investors into believing an investment is legitimate or protected against losses. In some cases, fraud promoters may try to convince investors to move assets from an existing self-directed or traditional IRA into a fake self-directed IRA held by a custodian created and owned by the scam artist.

6. Risky Oil and Gas Drilling Programs: Many people today are considering alternative investments including oil and gas drilling investments as opposed to traditional stocks, bonds and mutual funds. Unfortunately, energy investments can prove to be a poor substitute for traditional retirement planning. Oil and gas drilling programs typically involve a high degree of risk and are suitable only for investors who could take the loss of their principal. Some promoters will conceal risks, using high pressure sales tactics and deceptive marketing to peddle bad or risky investments in oil to the investing public. Investors should conduct thorough due diligence and assess their tolerance for steep risk when considering investing in oil and gas programs.

7. Proxy Trading Accounts: Investors should be wary of individuals who claim to have trading expertise and offer to set up or manage a trading account on an investor's behalf. Allowing an unlicensed individual to have access to the username and password for your brokerage account or worse, allowing an unlicensed individual to set up a brokerage account in your name, is a recipe for disaster. Allowing someone without the legally-required safeguards of proper registration and bonding to control your account can lead to substantial trading losses or the loss of investment funds through improper withdrawals from the account including theft.

8. Digital Currency: Virtual reality may exist only in science fiction, but consumers now are able to purchase goods and services with virtual money such as Bitcoin, PP Coin and other digital currencies. Unlike traditional coinage, these alternatives typically are not backed by tangible assets, are not issued by a governmental authority and are subject to little or no regulation. The value of digital currencies is also highly volatile. Investors should be aware that investments that incorporate abstract money systems present very real risks.

9. Capital-raising Pitfalls: Recent law changes and newly available capital from investors including "angels" – affluent individuals who provide capital for a business startup – have changed the business funding landscape. The new and enhanced opportunities to raise capital through crowdfunding, public advertising for investors under JOBS Act regulations and angel funding "solutions" also carry risks for unwary entrepreneurs. Securities offerings either must be exempt from registration requirements or properly registered, even under the new laws. Remember a security can be a stock, note, agreement, financial instrument or anything else that provides an investor with an expectation of participating in the profits the entrepreneur generates.

10. Unregulated Third Party Service Providers: The implementation of the JOBS Act has created opportunities for unregulated third parties to provide ancillary services. Whether a crowdfunding portal or an accredited investor aggregator, it remains important to do your due diligence. Not only should a small business or other entrepreneur make sure they are dealing with a legitimate service provider, they should also make sure that the service being offered is in full compliance with all federal and state requirements. Use of crowdfunding portals, while subject to some regulation, also opens the door to scams. Businesses should be very careful to verify the legitimacy of a portal before engaging their services.

For more information click on North Carolina Department of the Secretary of State.


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