Corporate > AG Deal Diary > SEC Investor Alert: How to Be a Smart Investor Online
21 Nov '14

Earlier this week, the SEC’s Office of Investor Education and Advocacy issued an Investor Alert reminding investors seeking information and advice online to be wary of fraudulent investment schemes involving social media. In addition to cold calls and spam email, fraudsters are increasingly turning to social media sites to target unwitting investors. The SEC has five tips for those who go looking for investment opportunities online—and the tips translate for offline investment searches, too:

First, the SEC advises investors to be cautious of any unsolicited offer to invest. Difficult though it may be, resist the urge to believe that you are special online. That tempting investment offer in your LinkedIn inbox wasn’t designed just for you. In fact, the SEC encourages investors to report such unsolicited messages advertising “can’t miss” investments to the SEC Complaint Center.

Second, the SEC reminds investors of the common “red flags” of fraud: if it sounds too good to be true, it probably is; nothing in life is guaranteed (especially risk-free investment returns); and true “once-in-a-lifetime” investments are unlikely to be advertised.

Third, investors should beware of “affinity fraud,” which refers to investment scams that prey upon members of identifiable groups. Just because an investment opportunity is recommended by your neighbor or a member of your town club doesn’t mean it’s a legitimate or prudent investment for your particular circumstances.

Fourth, investors can minimize unsolicited offers by staying on top of the privacy and security settings of their social media profiles to safeguard their personal information. Investors can refer to an earlier SEC Investor Bulletin titled Social Media and Investing – Understanding Your Accounts for further guidance.

Fifth, the SEC encourages investors to ask questions and conduct their own background research. Never take claims or projections in comment threads at face value—every investment merits due diligence. Investors can research public companies by searching the EDGAR filing system and look up investment advisors and registered brokers on websites run by the SEC and FINRA, respectively. Information on non-public companies may be available from state regulators.

The Investor Alert also gives some examples of common investment scams perpetuated online and via social media. One is the “pump-and-dump” scheme brought to bacchanalian life in last year’s The Wolf of Wall Street: a fraudster (often a company insider) hypes up a company’s stock by making false or misleading statements about the business and encouraging others to buy. In the early 1990s, Jordan Belfort used cold-calling and questionable promotional events to pump stock prices; today, fraudsters are turning to Twitter, LinkedIn and Facebook to build up investor excitement. As unsuspecting investors buy up the stock, the value rises and the fraudster cashes out early at the inflated stock price, leaving the investors empty-handed once the market settles. Another common effort is the “high-yield investment program” or “HYIP,” which is an official-sounding name for what is essentially a scam by unlicensed individuals offering impossible returns (remember, junk bonds by another name are high-yield debt!).

Investors can report fraud to the SEC, FINRA or their local regulator (information on how to contact your local regulator is available on the NASAA’s website).

The internet provides fraudsters with ample opportunity to target eager investors. The SEC’s Investor Alert is a great reminder of some common-sense principles for avoiding investment scams, both on- and offline.