Avoiding Internet Investment Scams: Tips for Investors
Aug. 15, 2007
You should be skeptical of investment opportunities you learn about through the Internet. When you see an offering on the Internet – whether it's on a company's website, in an online newsletter, on a message board, or in a chat room – you should assume it's a scam until you've done your homework and proven otherwise.
Get the facts before you invest, and only invest money you can afford to lose. You can avoid online investment scams by asking – and getting answers to – these three simple questions:
Is the investment registered?
To find out, check the SEC's EDGAR database. Some smaller companies don't have to register their securities offerings with the SEC, so always check with your state securities regulator. You'll find that number in the government section of your phone book. Or call the North American Securities Administrators Association (NASAA) at (202) 737-0900 or visit NASAA's website.
Many online investment scams involve unregistered securities. But the fact that a company has registered and files reports with the SEC doesn't guarantee that the company will be a good investment. Likewise, the fact that a company hasn't registered and doesn't file reports with us doesn't mean the company is a fraud. You may be asking for serious losses if you invest in a small, thinly traded company that isn't widely known solely on the basis of what you read on a bulletin board posting or saw in an online newsletter. One simple phone call o your state regulator could prevent you from squandering your money on a scam.
Is the person licensed and law-abiding?
Find out if the person or firm selling the investment needs to be licensed. Call your state securities regulator and ask whether the person or firm is licensed to do business in your state and whether they have a record of complaints or fraud. You can also get this information by calling FINRA's public disclosure hotline at (800) 289-9999 or visiting their website.
Does the investment sound too good to be true?
If it does, it probably is. High-yield investments tend to involve extremely high risk. Never invest in an opportunity that promises "guaranteed" or "risk-free" returns. Watch out for claims of astronomical yields in a short period of time. Be skeptical of "off-shore" or foreign investments. And beware of exotic or unusual sounding investments, especially those involving so-called "prime bank" securities. To learn more about "prime bank" securities, visit the Division of Enforcement's Prime Bank Fraud Information Center on our website.
Make sure you fully understand the investment before you part with your hard-earned money. Always ask for – and carefully read – the company's prospectus and latest financial statements.
For more tips on avoiding online fraud, read Internet Fraud: How to Avoid Internet Scams. You can get this brochure by calling the SEC's toll-free publications line at (800) SEC-0330 or visiting the "Internet and Online Trading" section of our website.