Investor Protection & Securities:: Investor Education:: Publications from the Securities Division:: Top Threats to Investors
Top Threats to Investors
Consumers lose billions of dollars every year to investment fraud. It touches all segments of society, every level of income, and every age. Investors are lured by the promise of high returns or huge tax savings with little or no risk. Sounds too good to be true? Well, it usually is. Far too many investors plunge into investments without first investigating them. The same scams are used over and over again on people who do not take the time to check out the offers or learn the danger signs.
The Securities Division is a division of the Office of Secretary of State. This office regulates investments sold in Missouri and the people who sell them - stockbrokers, financial planners and the companies they work for. If you would like to check the registration of the promoted investment, inquire about the licensing status and possible disciplinary history of an investment professional, or if you need to file a complaint, contact the Secretary of States' Office, Securities Division's Investor Protection Hotline at 1-800-721-7996
To help identify red flags for potential scams, here is a short list of the most common types of fraud:
- Unregistered products/unlicensed salespeople: The offer of securities by an individual without a securities license should be a red alert for investors. Con artists also try to bypass state requirements to pitch unregistered investments with a promise of “limited or no risk” and high returns.
- Third Parties Managing Online Discount Brokerage Accounts: Missourians should be aware of offers to set up or "manage" online brokerage accounts by individuals claiming to be investment professionals. Do not share your user name or password with anyone.
- Investment Fads: Emerging investment opportunities such as digital currency, crowdfunding, oil and gas, or natural resource mining may sound appealing, but typically require an extremely high level of specific knowledge to be profitable.
- Promissory Notes: In an environment of low interest rates, the promise of high-interest-bearing promissory notes may be tempting to investors, especially seniors and others living on a fixed income. Promissory notes generally are used by companies to raise capital. Legitimate promissory notes are marketed almost exclusively to corporate investors with the resources to research thoroughly the companies issuing the notes and to determine whether the issuers have the capacity to pay the promised interest and principal. Most promissory notes must be registered as securities with the SEC and the states in which they are sold. 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. Short-term notes that appear to be exempt from securities registration have been the source of most – but not all – of the fraudulent activity involving promissory notes.
- Real Estate Investments: Potentially troublesome real estate-related investments include non-traded real estate investment trusts (REITs), timeshare resales, and brokered mortgage notes. These types of products often carry higher risk. For example, non-traded REITs are sold directly to investors and are not traded on exchanges (as are conventional REITs). Non-traded REITs can be risky and have limited liquidity, which may make them unsuitable for certain investors.
- Ponzi Schemes: The premise is simple: pay early investors with money raised from later investors. The only people certain to make money are the promoters who set the Ponzi in motion.