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Internet Fraud: How to Avoid Internet Investment Scams
The Internet serves as an excellent tool for investors, allowing them to easily and inexpensively research investment opportunities. But the Internet is also an excellent tool for fraudsters. That's why you should always think twice before you invest your money in any opportunity you learn about through the Internet.
This alert tells you how to spot different types of Internet fraud, what the SEC is doing to fight Internet investment scams, and how to use the Internet to invest wisely.
Navigating the Frontier: Where the Frauds Are
The Internet allows individuals or companies to communicate with a large audience without spending a lot of time, effort, or money. Anyone can reach tens of thousands of people by building an Internet web site, posting a message on an online bulletin board, entering a discussion in a live "chat" room, or sending mass e-mails. It's easy for fraudsters to make their messages look real and credible. But it's nearly impossible for investors to tell the difference between fact and fiction.
Online Investment Newsletters
Hundreds of online investment newsletters have appeared on the Internet in recent years. Many offer investors seemingly unbiased information free of charge about featured companies or recommending "stock picks of the month." While legitimate online newsletters can help investors gather valuable information, some online newsletters are tools for fraud.
Some companies pay the people who write online newsletters cash or securities to "tout" or recommend their stocks. While this isn't illegal, the federal securities laws require the newsletters to disclose who paid them, the amount, and the type of payment. But many fraudsters fail to do so. Instead, they'll lie about the payments they received, their independence, their so-called research, and their track records. Their newsletters masquerade as sources of unbiased information, when in fact they stand to profit handsomely if they convince investors to buy or sell particular stocks.
Some online newsletters falsely claim to independently research the stocks they profile. Others spread false information or promote worthless stocks. The most notorious sometimes "scalp" the stocks they hype, driving up the price of the stock with their baseless recommendations and then selling their own holdings at high prices and high profits. To learn how to separate the good from the bad, read our tips for checking out newsletters.
Online bulletin boards – whether newsgroups, usenet, or web-based bulletin boards – have become an increasingly popular forum for investors to share information. Bulletin boards typically feature "threads" made up of numerous messages on various investment opportunities.
While some messages may be true, many turn out to be bogus – or even scams. Fraudsters often pump up a company or pretend to reveal "inside" information about upcoming announcements, new products, or lucrative contracts.
Also, you never know for certain who you're dealing with – or whether they're credible – because many bulletin boards allow users to hide their identity behind multiple aliases. People claiming to be unbiased observers who've carefully researched the company may actually be company insiders, large shareholders, or paid promoters. A single person can easily create the illusion of widespread interest in a small, thinly-traded stock by posting a series of messages under various aliases.
Because "spam" – junk e-mail – is so cheap and easy to create, fraudsters increasingly use it to find investors for bogus investment schemes or to spread false information about a company. Spam allows the unscrupulous to target many more potential investors than cold calling or mass mailing. Using a bulk e-mail program, spammers can send personalized messages to thousands and even millions of Internet users at a time.
How to Use the Internet to Invest Wisely
If you want to invest wisely and steer clear of frauds, you must get the facts. Never, ever, make an investment based solely on what you read in an online newsletter or bulletin board posting, especially if the investment involves a small, thinly-traded company that isn't well known. And don't even think about investing on your own in small companies that don't file regular reports with the SEC, unless you are willing to investigate each company thoroughly and to check the truth of every statement about the company. For instance, you'll need to:
And it doesn't stop there. For a more detailed list of questions you'll need to ask – and have answered – read Ask Questions. And always watch out for tell-tale signs of fraud.
Here's how you can use the internet to help you invest wisely:
Start With the SEC's EDGAR Database
The federal securities laws require many public companies to register with the SEC and file annual reports containing audited financial statements. For example, the following companies must file reports with the SEC:
Anyone can access and download these reports from the SEC's EDGAR database for free. Before you invest in a company, check to see whether it's registered with the SEC and read its reports.
But some companies don't have to register their securities or file reports on EDGAR. For example, companies raising less than $5 million in a 12-month period may be exempt from registering the transaction under a rule known as "Regulation A." Instead, these companies must file a hard copy of the "offering circular" with the SEC containing financial statements and other information. Also, smaller companies raising less than one million dollars don't have to register with the SEC, but they must file a "Form D." Form D is a brief notice which includes the names and addresses of owners and stock promoters, but little other information. If you can't find a company on EDGAR, call the SEC at (202) 551-8090 to find out if the company filed an offering circular under Regulation A or a Form D. And be sure to request a copy.
The difference between investing in companies that register with the SEC and those that don't is like the difference between driving on a clear sunny day and driving at night without your headlights. You're asking for serious losses if you invest in small, thinly-traded companies that aren't widely known just by following the signs you read on Internet bulletin boards or online newsletters.
Contact Your State Securities Regulators
Don't stop with the SEC. You should always check with your state securities regulator, which you can find on the website of the North American Securities Administrators Association, to see if they have more information about the company and the people behind it. They can check the Central Registration Depository (CRD) and tell you whether the broker touting the stock or the broker's firm has a disciplinary history. They can also tell you whether they've cleared the offering for sale in your state.
Check with NASD
To check the disciplinary history of the broker or firm that's touting the stock, use NASD's BrokerCheck website, or call NASD's BrokerCheck Program hotline at (800) 289-9999.
Investigate Before You Invest |Top Ten Questions To Help You Avoid Trouble | Avoiding Online Investment Scams: Tips for Investors | Fraud In Cyberspace | Tips for Checking Out Online Newsletters: | Internet Fraud: Investor Tips | Choosing an Investment Professional | Cold Callers Must Follow Certain Rules | Portrait of a "Boiler Room" | Where the Frauds Are | Where the Frauds Are Part 2 | Fake Seals and Phony Numbers | Investor Alert | Tips for Avoiding Stock Scamson the Internet | Risky Business: "Pre-IPO" Investing | Avoiding Internet Investment Scams | Microcap Stock: A Guide for Investors | Trade Execution | Your Dollars at Risk | Tips for Online Investing | Questions asked about your Investments | Day Trading Ads: Cutting Through the "Bull" | Futures and Options: What You Should Know Before You Trade | Investment Risks | Invest Wisely: An Introduction to Mutual Funds | Variable Annuities: What You Should Know FAQ On Bond Investing