NASAA has identified a number of “red flags” that may result in fraudulent activity occurring. In a publication to investors, the following were identified as warning signs of fraud:
*While offshore investments may allow the deferral of taxes, they cannot be avoided completely.
If you see any of the same situations or language referenced above in a test question, a fraudulent scenario is most likely present. If it doesn’t pass the “smell test,” it’s likely fraud!
As our modern, digital world evolves, so does fraud. As newer forms of fraud begin developing in the real world, we expect them to start showing up in test questions. NASAA is currently highlighting the following as the top investor threats today:
Social media & internet investment fraud
As we become more connected to each other online through social media platforms, instances of fraudulence on the internet are on the rise. NASAA is particularly concerned with the following online-based scenarios:
*”Recruit your friends” campaigns involve engaging networks of friends, gaining their trust, then encouraging the network to invest in a fraudulent product. When some of the network “buys in,” the fraudster then guilt trips the others into making the same investment. “Your friends did it. Why wouldn’t you?”
Cryptocurrency-related investment fraud
With the recent popularization of cryptocurrencies (Bitcoin in particular), e-currencies are becoming a legitimate part of the financial sector. While many investors have used cryptocurrencies to diversify their portfolios, there have been numerous instances of fraud. NASAA makes the following recommendation to investors:
Before you jump into the crypto craze, be mindful that cryptocurrencies and related financial products may be nothing more than public-facing fronts for Ponzi schemes and other frauds. And because these products do not fall neatly into the existing federal/state regulatory framework, it may be easier for the promoters of these products to fleece you. Investing in cryptocurrencies and related financial products accordingly should be seen for what it is: extremely risky speculation with a high risk of loss.
Precious metal fraud
Investments in precious metals like gold, platinum, and silver are becoming more popular. To ensure investors are knowledgeable about this type of commodity, NASAA makes the following proclamations:
*Retirement accounts (like IRAs) do not allow the investor to gain access to the assets held in the account until retirement. Therefore, direct IRA investments in precious metals must be held with a third party. Extra caution and care should be exercised, and only reputable third parties should be utilized for this service.
Foreign currency exchange fraud
Investors can make bets on the value of currencies in the foreign exchange (known as ‘forex’) markets. A number of fraudulent forex products and services have been offered online and elsewhere, only to be a worthless investment. Even if legitimate, this is a volatile market.
Promissory note fraud
In a previous chapter, we discussed how promissory notes (a.k.a. commercial paper) could be exempt from registration if meeting certain qualifications. Interestingly enough, the exempt versions of promissory notes have been recently subject to the most fraud.
Investors should be cautious about promissory notes with durations of nine months or less, as these notes generally do not require federal or state securities registration. Such short-term notes have been the source of most (though not all) of the fraudulent activity involving promissory notes identified by state securities regulators. These short-term debt instruments may be offered by little-known (or perhaps even nonexistent) companies and extend promises of high returns – perhaps over 15 percent monthly – at little to no risk. But if an investment sounds too good to be true, it probably is.
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