Investing

Eight Clear Signs That An Investment Opportunity Is Probably A Scam

By 
Karen Banes
Karen Banes is a freelance writer specializing in entrepreneurship, parenting and lifestyle. Her work has appeared in publications including The Washington Post, Life Info Magazine, Transitions Abroad, Brave New Traveler, Natural Parenting Group, and Copia Magazine.

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To make Wealthtender free for readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a conflict of interest when we favor their promotion over others. Read our editorial policy and terms of service to learn more. Wealthtender is not a client of these financial services providers.
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It has been estimated that almost 90,000 Americans were involved in investment scams in 2021 alone, losing a total of around $1.58 billion. This indicates an increase of around 82% based on the previous year, so to say that these scams are becoming more prevalent would be an understatement.

While most of us believe we would never fall for a scam, some of them are extremely sophisticated, and no one is entirely immune. Here are just a few of the red flags to watch out for when it comes to keeping your money out of the hands of scammers.

1. It came out of the blue

Unsolicited financial advice is rarely sound. Any opportunity that presents itself to you ‘out of the blue’ needs to be treated with extreme caution. This is the case, no matter what the source. Even if the recommendation appears to come from a friend. In fact, financial information that appears to come from a friend, electronically, is a sign that a friend may have been hacked, especially if they wouldn’t usually share something like that.

The best financial advice is generally advice you seek out, from a professional. Even if you are sure an opportunity that’s presented to you is a sound one, the first step should be to run it past your financial advisor, if you have one, or someone else you trust. There’s a reason scammers tend to target more vulnerable and isolated people. It’s easier to spot a scam when you discuss it with others.

2. You discovered it on social media

No, you didn’t. It discovered you. The Federal Trade Commission (FTC) has reported that 54% of investment fraud losses originate on social media channels and has described social media as a gold mine for scammers. Over a quarter of the people who reported losing money to fraud in 2021 reported that the scam started on social media with either an ad, a post, or a private message.

Remember that social media makes targeted advertising very simple, so if ads crop up that are suggesting investments that you have been considering recently, that’s not ‘a sign’. That’s simply social media companies selling your data to advertisers. Instagram and Facebook are the most common places to stumble across a scam, but it also happens on messaging apps such as WhatsApp, Telegram, and Snapchat, as well as other networking and sharing sites, from LinkedIn to TikTok.

3. It sounds so good

Scammers always over-promise. Typical red flags include the promise of very fast or consistently high returns, especially if they are ‘guaranteed’. Buzzwords to watch out for are ‘risk-free’, ‘trade secret’ and anything along the lines of ‘95% of investors don’t know this’. Investment scams take many forms, and new ones emerge all the time, but they usually come with a pretty hard sell and a legitimate-sounding reason why this investment is different from and better than, all the others.  As always, if something sounds too good to be true, it is.

4. One or two small details are off

A common investment scam involves scammers actually ‘cloning’ or copying the websites of legitimate brokers, exchanges, and other financial institutions. The site may look the same as the legitimate site, have the official brand logo and the same words and images, but the URL will be slightly different. They will even quote the license number of the legitimate firm, so if you look the firm up via a regulating body such as FINRA, it will appear to be listed and regulated.

Maybe at this point, you will spot those one or two details that are wrong. The phone number or email address may be listed as a different one on the regulator’s site. At this point, you are on to the scammer, but even now it’s possible they will remain cool, and simply say that the details on the regulator’s site need to be updated.

5. It involves cryptocurrency

Investing in cryptocurrency is a legitimate enough strategy if it suits your knowledge base and risk appetite. If, however, you’ve never been interested in cryptocurrency and you’re suddenly being asked to buy it in order to make a specific investment or transfer, that’s a huge red flag.

Cryptocurrency offers a certain amount of anonymity and crypto transactions are hard (though not impossible) to trace. There have been a ton of crypto scams recently, especially Initial Coin Offering (ICO) scams and exit scams, where a new cryptocurrency is offered, investors are found, but the coin itself doesn’t end up ever being successfully launched, and the developers or promoters simply disappear with the investors’ money.

6. It involves transfers using hard-to-trace methods

Bank transfers leave a trail. Credit card payments can be reversed. If someone is insisting you can only access their amazing opportunity using a particular transfer method such as online electronic wallet transfers, third-party payment methods, crypto, or pre-paid cards, it could be because they’re harder to trace.

7. You’re being pressured

Legitimate financial advisors won’t generally apply time pressure on you to make an investment. Scammers almost always have a time-sensitive opportunity that you have to invest in by a certain date in order to profit.

It’s not just time pressure you have to watch out for. Scammers will pressure you into investing more than you can afford and investing even more later on. They’ll also pressure you into investing in a certain way, which as already mentioned, may involve hard-to-trace transfers, and into keeping their ‘secret’ because they can only share it with a limited number of people.

8. Something just feels off

Some scammers are excellent at what they do. Many aren’t. They will tend to leave clues that they are less than legit. If something about an investment opportunity doesn’t feel quite right, trust your gut. Step back. Take professional advice, and stay safe.

Investment Scam FAQs

If you fear you’ve been the victim of an investment scam or you’re being targeted by a shady character, the Securities and Exchange Commission (SEC) provides useful insights on what to do and who you can contact. For your convenience, we’ve compiled a list of FAQs with responses from this August 2022 SEC Investor Alert.

Who should I contact if I believe I’m the victim of an internet crime?

If you believe you have been the victim of an Internet crime, report it to the FBI’s Internet Crime Complaint Center IC3.

What is a Romance Scam?

Romance scams through apps or websites have become increasingly pervasive as fraudsters take advantage of anonymity to mask their deceptive intentions.  The fraudster may be located in another country and communication may be exclusively through messaging due to language barriers.  Do not invest money based on advice from someone you have solely met online or through an app.  Do not share any information relating to your personal finances or identity including your bank or brokerage account information, tax forms, credit card, social security number, passport, driver’s license, birthdate, or utility bills. 

The FBI issued a Public Service Announcement about fraudsters using romance scams to persuade victims to send money allegedly to invest or trade cryptocurrency.  How these scams typically work is the fraudster establishes an online relationship with the victim through a dating app or other social media site.  The fraudster gains the victim’s confidence and trust, and then claims to know about lucrative cryptocurrency investment or trading opportunities. The fraudster directs the victim to a fraudulent website or app.  After the victim invests and sees a purported profit, the website or app allows the victim to withdraw a small amount of money, further gaining the victim’s trust.  The fraudster then instructs the victim to invest larger amounts of money and conveys a sense of urgency.  When the victim tries to withdraw funds again, the victim is instructed to pay additional funds, claiming that taxes or fees need to be paid or a minimum account balance must be met. When the victim can no longer pay the additional funds, the fraudster stops communicating with the victim and the victim cannot get the money back.

Other agencies and organizations also have issued warnings about romance scams, including:

What is a “Crypto” Investment Scam?

Fraudsters may exploit investors’ fear of missing out to lure investors on social media into “crypto” investment scams.  “Crypto” assets are marketed using a variety of terms, including digital assets, cryptocurrencies, coins, and tokens. 

How do you know if an investment involving “crypto” assets is a scam?  As with any other type of investment product, if a crypto investment “opportunity” sounds too good to be true, it probably is.  Promises of high investment returns, with little or no risk, are classic warning signs of fraud.  Fraudsters may post fabricated historical returns on their websites showing high investment returns.  Depictions of investment accounts rapidly increasing in value and providing large returns are often fake.  

If you are considering a “crypto” asset-related investment, take the time to understand how the investment works and look for warning signs that it may be a scam.  Carefully review all materials and ask questions.  Check out the background (including license and registration status) of anyone offering you an investment in securities using the search tool on Investor.gov.

Learn more about investments involving “crypto” assets on Investor.gov.

What are impersonation schemes?

Fraudsters may impersonate legitimate brokers or investment advisers or other sources of market information on social media.  For example, fraudsters may set up an account name, profile, or handle designed to mimic a particular individual or firm.  They may go so far as to create a webpage that uses the real firm’s logo, links to the firm’s actual website, or references the name of an actual person who works for the firm.  Fraudsters also may direct investors to an imposter website by posting comments in the social media account of brokers, investment advisers, or other sources of market information.

When you receive investment information through social media, verify the identity of the underlying source.  Look for slight variations or typos in the sender’s account name, profile, email address, screen name, or handle, or other signs that the sender may be an imposter.  When contacting a company or attempting to access its website, be sure to use contact information or the website address provided by the company itself, such as in the company’s SEC filings.  Similarly, only contact a broker or investment adviser using contact information you verify independently – for example, by using a phone number or website listed in the firm’s Client Relationship Summary (Form CRS).  Carefully type the website’s url into the address bar of your web browser.

Some social media operators have systems that may help you to determine whether a sender is genuine.  For example, Twitter verifies accounts for authenticity by posting a blue verified badge (a solid blue circle containing a white checkmark) on Twitter profiles.  While a verified account does not guarantee that the source is genuine, readers should be more skeptical of information from accounts that are not verified.

Fraudsters may even impersonate SEC staff on social media.  Like many companies and agencies, the SEC maintains a list of verified social media accounts, which is available at www.sec.gov/opa/socialmedia.

Fraudsters have also found victims by hacking into social media profiles and sending fraudulent investment opportunities to the hacked person’s contacts.  Be wary if someone – even someone you trust – sends a social media message recommending an investment, and be sure to check with them “off-line” to make sure that person actually sent the message.

What are market manipulation schemes?

Fraudsters can manipulate the share price of a company’s stock (either positively or negatively) by spreading rumors on social media. Fraudsters then profit at investors’ expense.  Fraudulent stock promotions on social media can take various forms, including memes.

Fraudsters may promote a stock on social media anonymously or while pretending to be someone else.  Fraudsters can set up new accounts specifically designed to carry out their scam while concealing their true identities.  Be skeptical of information from social media accounts that lack a history of prior postings or that contain minimal original content.

Fraudsters may use social media to conduct schemes including: 

  • Pump and dump schemes – pumping up the share price of a company’s stock by making false and misleading statements to create a buying frenzy, and then selling shares at the pumped up price. 
  • Scalping – recommending a stock to drive up the share price and then selling shares of the stock at inflated prices to generate profits.
  • Touting – promoting a stock without properly disclosing compensation received for promoting the stock. 

In other instances, fraudsters start negative rumors urging investors to sell their shares so that the share price plummets and then the fraudsters buy shares at the artificially low price.

Microcap Fraud. Microcap stocks (low-priced stocks issued by the smallest of companies), including penny stocks (the very lowest priced stocks), are more susceptible to market manipulation.

Exercise extreme caution if there appears to be greater promotion of the company’s stock than of the company’s products or services.  Be skeptical regarding new posts on your wall, tweets, direct messages, emails, or other communications you did not ask for that promote a particular stock (even if the sender appears connected to someone you know). 

What is Community-Based Investment Fraud?

Fraudsters often use social media to perpetuate community-based investment fraud (aka affinity fraud), which targets members of groups with common ties, including based on ethnicity, nationality, religion, sexual orientation, military service, and age.  These scams exploit the trust and friendship that exist within groups. 

Many communities use social media as a way to stay connected and share information.  Fraudsters, who may be (or pretend to be) part of the group they are trying to cheat, may solicit potential victims on social media through posts or direct contact.  Fraudsters also may enlist group leaders, who then spread the word about the scheme on social media.  Those leaders may not realize the “investment” is actually a fraud, which means they too may be victims.

Know who you are dealing with and know what is being offered – even if you have something in common with the person.  Type the person’s name into the search tool on Investor.gov to do a background check.  Confirm that the person is currently registered or licensed, and find out if that person has any disciplinary history.  

Karen Banes is a freelance writer specializing in entrepreneurship, parenting and lifestyle. She writes articles, website content, ebooks and the occasional award winning short story. Her work has appeared in a range of publications both online and off, including The Washington Post, Life Info Magazine, Transitions Abroad, Brave New Traveler, Natural Parenting Group, and Copia Magazine. Learn More About Karen

To make Wealthtender free for readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a conflict of interest when we favor their promotion over others. Read our editorial policy and terms of service to learn more. Wealthtender is not a client of these financial services providers.
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