Top Investor Threats
Each year, the North American Securities Administrators Association (NASAA) surveys its member agencies (including the Minnesota Department of Commerce) to identify the most problematic products, practices or schemes. In 2016, the following were cited most often:
Unregistered Products/Unlicensed Salesperson: Investors should check if the product and the salesperson are registered in Minnesota at the Commerce Department website or by contacting the Securities unit by phone at 651-539-1638. Con artists will try to bypass stringent state registration requirements to pitch unregistered investments with a promise of “limited or no risk” and high returns.
Promissory Notes: With historically low interest rates, the promise of high-interest promissory notes may be tempting to investors, especially seniors and others living on fixed incomes. Average investors should be cautious when considering promissory notes, which are almost exclusively sold to corporate investors who have the resources to conduct due diligence and evaluate risk.
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 identified by regulators.
Oil/Gas Investments: Many oil and gas investment opportunities, while involving varying degrees of risks to the investor, are legitimate in their marketing and responsible in their operations. However, as with many other investment opportunities, it is not unusual for unscrupulous promoters to attempt to take advantage of investors by engaging in fraudulent practices.
Fraudulent oil and gas deals frequently are structured with the limited partnership (or other legal entity) in one state, the operation and physical presence of the field in a second state, and the offerings made to prospective investors in states other than the initial two states. As a result, there is less chance of an investor dropping by a well site or a nonexistent company headquarters. Such a structure also makes it difficult for authorities and victims to identify and expose the fraud.
Real Estate-related Investments: Troublesome real estate-related investments identified by securities regulators included non-traded real estate investment trusts (REITs) 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. Like many investment frauds, Ponzi schemes are tempting because they often promise “guaranteed” high returns. If an offer seems too good to be true, it probably is.
Before making any decisions with your money, ask questions, make sure you understand the risks and check with the Commerce Department for detailed background information about those who sell securities or give investment advice, as well as about the products being offered.
Commerce is here to help
If you need to check on an investment, adviser, or broker, believe you may have been the victim of a scam or fraud, contact the Commerce Department’s Consumer Services Center by email at email@example.com or by phone at 651-539-1600 or 800-657-3602 (Greater Minnesota).