Early in my career, I had a meeting with a friend, who was a lawyer at that time. I wanted him to invest some of his money with my firm. He said that he was currently earning a guaranteed 12% from a guy in California. He also said his father introduced him to the guy and it was going great. I was not able to compete with that so I walked away.
Five years later, I asked that friend of mine how the investment was doing. He told me that it was a Ponzi scheme. He lost more than one million dollars.
Stories like this occur way to often. It brings the trust level down for our industry. I attended a seminar last October which was facilitated by a local law firm by the name of Ray Quiney Nebeker.
One of the presenters was Attorney Mark W. Pugsley. He was passionate about shutting down these ponzi schemes. He shared these 10 useful tips.
10. Slow down.
Many people invest after only hearing the pitch; watch out for promoters who’ll try to make you commit on the spot. Don't do it! Take your time, do your research, ask lots of questions, search the internet, review their financials, visit the company, kick the tires before you buy, etc. Be very wary of aggressive sales pitches and deadlines. Ask tough questions before you hand over your money, not after.
9. Do your homework.
Run a simple Google search on the company and its managers, or the individual. If it involves a company, ask for a private placement memorandum and company financials. Hire an attorney to evaluate the investment and help you perform due diligence. Attorneys have access to court databases to look for lawsuits and bankruptcies. Contact federal and state securities regulators to check if actions have been previously taken against the company or individuals involved.
8. Hire an attorney.
Attorneys can be expensive, but it’s cheaper to hire an attorney to document the transaction properly on the front end than to sue the bad guys (who may or may not be solvent) when it all blows up. A good lawyer can help you perform due diligence on the company and individuals, and can determine whether the investment is properly structured as a private offering. An attorney can also check if the company complies with state and federal statutes. Your lawyer can review the offering materials and help you understand what the risks are. Hiring a good attorney up front is a worthy investment
7. Get it in writing.
I am amazed by how often people will give hundreds of thousands of dollars to someone on nothing more than a handshake. Don't do it! If things go bad later, proper documentation will be critical for me to get your money back. The terms of your deal should always be put in writing, and those terms should be reviewed by the competent attorney you hired. In any private investment opportunity, a detailed, lengthy disclosure document called a private placement memorandum (PPM) should be given. Take the time to review it before you invest. It contains detailed information about all aspects of the business including the business model, financial history, risk factors, and biographical information on the managers, civil lawsuits, and the terms and conditions of the investment, among other things. If the company soliciting your money has not prepared a PPM, that should end of your discussions with them.
6. Beware of guarantees.
If anyone tells you that your investment is “guaranteed”, that should cause some concern. All investments carry risks, and personal guarantees (especially oral ones) are rarely a means to get your money back. Loans can be very risky if not properly secured, even if you were approached to do it or even if you receive a promissory note. If you are told that the loan or investment is "secured”, hire an attorney to document the security interest and verify the collateral. (See Number 8.)
5. Beware of secret trading strategies, offshore investments, commodity or currency (FOREX) trading, futures, options and minerals.
Avoid anyone who credits a highly complex or secretive investing technique or touts unusual success. Legitimate professionals should be able to explain clearly what they are doing and how they make money. And if the individual is really making as much money with their strategy as they say they are, they shouldn't need yours. These types of "alternative" investments always involve extremely high risk, despite what you were told.
4. Work through licensed stock brokers or investment advisors.
Investing in a private (unregistered) offer would require you to ask whether the promoter is licensed to sell you the investment, the regulator who issued the license, and whether the license has ever been revoked or suspended. A legitimate securities salesperson must be properly licensed under any circumstances. If you are suspicious about the legitimacy of the license, or had problems in the past, contact the Utah Division of Securities at (801) 530-6600 or look at FINRA's Broker Check website (https://brokercheck.finra.org/).
3. Don't invest with friends and neighbors.
It may seem like doing business with someone you know and trust would be safer, but that is simply not true. All investing involves risks. Trusting the individual soliciting the investment does not mean that the investment itself is good. Trust but verify; and if things go badly or you start to see red flags, do not hesitate to aggressively protect your interests.
2. Keep church out of investing.
If someone pitching an investment to you casually mentions that they used to be a bishop, a nun or in some other church position, watch out! Church positions are not relevant to investment decisions, so beware of those who bring these issues to the table.
1. If it sounds too good to be true, it probably is.
If you are thinking about putting money into an alternative, unregistered, or unregulated investment that promises abnormally high returns, be careful! The fact that others may have been getting their promised returns doesn’t mean you will. All Ponzi Schemes eventually implode, and you may be left holding the bag.