Last time we discussed the importance of slowing down and taking your time when making investment decisions. This week, I am addressing another important aspect of protecting yourself from fraud: doing your homework before handing over your hard-earned money.
Tip #2 — Do Your Homework
Many scammers rely on the fact that potential victims will not do their due-diligence and investigate the opportunity carefully before investing. I am often shocked to learn that otherwise careful, highly-educated people have gotten caught up in a scam because they assumed someone else had done the homework for them. They assume that their friend who told them about the opportunity had already done all the research, so why reinvent the wheel?
Regardless of the track record of the company, which friends have invested, or how well you know the person who is soliciting the investment, it is important to take time to fully research any investment opportunity – particularly if it is a small private startup company.
Your research should start with a simple Google search on the company, its officers and the individual pitching the opportunity. Look into the background of the individuals and the company, ask hard questions, get their audited financials, get a copy of their business plan, and consult a legal professional before committing your money. Be particularly cautious with unsolicited investment pitches.
With any non-public investment you should request a “PPM” or private placement memorandum – and then read it carefully. If someone seeking your investment has not prepared a PPM or tells you they don’t need one, that should be a huge red flag.
Don’t be fooled by an aesthetically pleasing website, nice brochures, fancy offices or other appearances. Virtually anyone can create a sophisticated brochure or website these days, but that doesn’t mean the company is legitimate.
It can often be helpful to hire an attorney to help you evaluate the investment. Attorneys can look for red flags and access court databases to search for lawsuits and bankruptcies. You can also contact federal and state securities regulators directly to see if actions have previously been taken against the company or individuals in question.
Review the contract, subscription agreement and any other paperwork with an attorney before signing anything, and never hand over a check before getting the terms of the transaction in writing. Your best defense against fraud is informing and educating yourself prior to making any financial commitments, large or small.
Finally, if you encounter something that looks like a scam, promptly report it to the SEC and to your state securities regulator. Your report can help prevent others from falling victim to that scam or fraud. You can also become a whistleblower and potentially qualify for a whistleblower award.
The Bottom Line: Don’t succumb to high-pressure sales tactics and skip the vetting process. Once your money is transferred it may be gone forever!
This is the second tip in a ten-part series helping people protect themselves against scams and fraud. Ray Quinney and Nebeker has a team of experts that are well versed in this area of law. For more information and resources, contact Mark W. Pugsley at moc.nqr@yelsgupm.
Copyright © 2020 by Mark W. Pugsley. All rights reserved.