In search of investments for working capital,
an oil company sends consumers surveys of
property that suggest the land is oil-rich.
The company’s sales force tells interested
consumers that top oil experts project the
fields will yield thousands of barrels of
oil a day — and a tidy return to investors
within a year.
A film production company
tells potential investors it is raising
capital to produce a high-quality, low-budget
family film with actors who are willing
to sacrifice their usual high salaries for
the sake of art. Claiming that the independent
film market, cable television and video
stores have increased the demand for movies,
investors are "guaranteed" to
make their money back. According to the
prospectus, investor money will be spent
on production, distribution and the screenplay.
Brokers of gemstones,
rare coins or precious metals tell investors
that the market price of these hard assets
is skyrocketing. According to the brokers,
the assets will increase in value —
not only because experts have graded them
rare, but also because of the demand.
Brokers of an FCC-licensed
partnership tell consumers they’re
raising capital to acquire a communications
business that can be enhanced with new technology
and turned into a competitive high-tech
enterprise to be sold or developed for huge
Investment brokers are
claiming to sell ownership interests in
a company that will offer Internet access
to the public. The brokers maintain that
investors will realize substantial gains
from the fees the company will charge its
What’s wrong with
these pictures? In a word — plenty.
- The oil surveys are fake. The land owned
by the company has not been drilled for
oil, and in a legitimate deal, much more
capital is required to determine if oil
could be produced from the land at all.
- The principals of the film-flam scam
are the "producers" and "screenwriters."
They take most of the money raised and
then use a small amount to produce a low-quality
film that is unlikely to turn a profit,
let alone be released commercially.
- Gemstone, rare coin or precious metal
scam promoters often charge very high
mark-ups and, as a result, consumers who
try to resell their assets almost always
lose most of their money.
- The communication technology promised
may be unavailable, unworkable or too
costly. The partnership brokers take most
of the money for themselves after they
acquire low-tech businesses for consumers
that would require millions of dollars
more to have even a slim chance at turning
- The fraudulent promoters generally structure
the deals to siphon off at least 85 percent
of investor money, never intending to
turn over a functioning business with
Internet expertise, equipment or staff.
Investors are left with little capital,
expertise or business with which to compete
on the Internet.
It’s easy to make
a new venture sound like a sure-fire money-maker,
especially if the press is writing about
successful legitimate companies in similar
industries. Fraud promoters create the illusion
of authenticity and success by incorporating,
renting office space and issuing partnership
units or stock certificates. But while they
claim to offer investments in exciting sounding
businesses or sell lucrative assets, they
deliver cheap imitations of what they promise.
As for consumers, they remain unaware that
they’ve bought something of little
or no value until their money is gone and
profits have not materialized.
Fraud is always a possibility, even with
secured, regulated investments. Before investing,
ask tough questions, both of yourself and
those who are soliciting your investments.
If the answer to any of these questions
is "no" — or if the answers
are vague or complicated — more than
likely the investment being pitched is a
the company I’m investing in registered
to sell securities?
Be cautious if the company selling you stock,
assets, or partnership units has not registered
its securities. Companies that register
their securities file prospectuses and annual
reports with securities regulators. If a
promoter tells you that your investment
is "structured" to exempt the
securities of the company from registration,
you may be dealing with an outfit that’s
purposely avoiding contact with regulators.
it "too late" if I don’t
invest my money now?
Using sales scripts, scam artists create
the impression that only a few shares of
stock or partnership units are left. They
try to convince you that you’ll miss
out on a big opportunity if you don’t
send them thousands of dollars by overnight
courier or wire transfer. Once you give
your money to a scam artist, it may be too
late to get it back.
the investment have a track record?
Claiming that their "opportunity"
is similar to those of "hot" entrepreneurs,
scam artists often use news stories about
the success of legitimate companies as bait.
Unfortunately, success stories of other
companies in the field are irrelevant for
your purposes. Get the track record of the
company you’re considering investing
in and the background of the people promoting
is my money going?
Legitimate companies account for investors’
money at all times. Ask for written proof
of how much of your money is going to the
actual purchase or development of the opportunity
and how much is going to commissions, promoters’
profits and marketing costs. If most of
your financial investment is slated to cover
expenses and costs, much less will be available
to earn a return. Telemarketing is particularly
expensive; if you are investing in a telemarketed
investment, how much are your brokers getting
paid to talk to you?
I have an independent, knowledgeable, trustworthy
person who can advise me?
Get an independent appraisal of the specific
asset, business or venture you’re
considering. An appraisal offered by the
party selling the investment opportunity
can be fake. Talk to the previous owners
of an asset or a business you’re acquiring
for its value history. Discuss all investment
ideas or plans with an accountant or an
advisor you know and trust.
I know who I’m dealing with?
Can you find published information about
the company in which you’re investing,
proof that the company has registered the
securities it is selling with a government
agency (if required), or someone you trust
who has heard of the company? Have you checked
with your state securities agency to see
if the promoter or sales person is licensed
to sell securities in your state, if required?
If not, be cautious. You’re giving
your money to strangers.
Checking law enforcement agencies and Better
Business Bureaus in the community where
promoters are located is prudent, but not
fool-proof. It may be too soon for the company’s
victims to realize they’ve been defrauded
or to have lodged complaints with the authorities.
In addition, fraudulent promoters can lie
about their name or their business history,
or even pay people to be "references."
I tell a genuine company from a fictional
Don’t let appearances fool you. For
a few dollars, anyone can incorporate an
entity. Personal computers and desktop publishing
software help scam artists produce slick
promotional materials. Phone service providers
can put toll-free telephone numbers in homes.
my sales representative tell me the risk
of losing my money was high?
Sales representatives should tell you the
risk of particular investments. Be particularly
suspicious of sales pitches that play down
risk or portray written risk disclosures
as routine formalities required by the government.
Believe the risk disclosures that say you
could lose your whole investment. When your
money is gone, fraudulent investment promoters
often use "risk disclosures" against
I be certain a promoter is not lying to
Scam artists lie. Their success depends
on having an airtight answer for everything.
They inflate the costs and value of worthless
investments. They promise you profits years
down the road so you won’t find out
that your investment is a scam until long
after they’ve disappeared with your
I know when something is too good to be
Investing is risky business. Anyone who
tells you an investment is likely to turn
a profit quickly should have a basis for
the claim. Demand written proof of profit
projections from independent sources. Be
especially wary when someone tells you profits
will be big enough to offset the risk of
investing. Every potentially high profit
investment is high risk.
Several government agencies and business
organizations register, regulate, investigate
or monitor companies and individuals who
offer investment opportunities. If you have
questions about a company or an individual,
or you wish to make a complaint, contact
one or more of these offices, as appropriate.
When you seek information, understand that
the absence of complaints filed with governmental
and private agencies does not mean that a
company or an investment is necessarily