Pennies From Heaven

Security Guard

Pssst. Want a hot investment tip? Beware of securities scams on the Internet.

Mounting complaints of online securities violations--more than 120 a day--have prompted the Securities and Exchange Commission (SEC) to set up a special unit focusing on the Web.

"A small group of thieves is trying to hijack unsuspecting investors on the Information Superhighway," says Richard H. Walker, enforcement director of the SEC. His agency identified more than 30 cases involving Internet-related securities fraud last year. Scams range from phony offerings and market manipulations to affinity frauds (aimed at a particular ethnic or religious group) and pyramid and Ponzi schemes.

Walker hopes the new unit will "beef up our Internet presence and continue the success of our Internet program." But investors must also be diligent. To help protect yourself from online scams, the SEC offers the following tips:

  • Investigate before investing. Don't trust what you read online. Consult a trusted financial advisor, broker or attorney.
  • Check with your state securities regulator or the SEC. Have they received complaints about the company, its managers or the promoter?
  • Don't assume people online are who they claim they are.
  • Ask the online promoter where the firm is incorporated. Verify that data with the secretary of state. Is a current annual report on file?
  • Get written financial information (prospectus, annual report, offering circular, financial statements) on any company you're considering. Beware if written data differs from online information or if you're told that such information is unavailable.
  • Be wary of promises of quick profits, offers to share "inside" information, pressure to invest immediately, and words like "guarantee," "high return" or "limited offer."
  • Watch out for offshore scams and investment opportunities in other countries.

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This article was originally published in the February 1999 print edition of Entrepreneur with the headline: Pennies From Heaven.

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