How Can You Tell if an Investment Opportunity is a Scam?

Written by Bloom Investment Counsel, Inc. on August 29, 2022. Posted in Financial Literacy.

With our increasing exposure to multiple internet and social media portals, our vulnerability to investment scams is magnified. If an investment opportunity sounds too good to be true, then it almost certainly is. Read this article and increase your awareness of investment opportunities that just may be scams.

Typical Investment Scam Indicators

You can make a lot of money with little or no risk.
You are offered a hot tip or access to inside information.
You must commit right away.
The seller isn’t registered with any securities regulator.
The investment opportunity is unsolicited (especially from strangers).

Types of Investment Scams

Scams that work are used repeatedly by investment con-artists. One of the best ways to avoid being a victim is to be aware of the most common fraud schemes.

The Canadian Anti-Fraud Centre provides descriptions of investment scams and publishes fraud alerts on the Government of Canada website when they discover an active scam. The provincial and territorial Securities Commissions also publish similar information and fraud alerts specific to their province or territory.

Common investment scams include:

1. The Affinity Fraud

This fraud takes advantage of the trust and friendship that exists within groups of people that have something in common, such as religious organizations, ethnic communities, social clubs, professional affiliations etc. The con-artist gains membership to the group and as their credibility grows, they spread information about their scheme.

2. The Ponzi Scheme

This scheme is based on an investment that doesn’t actually exist. Earlier investors are paid the promised high returns from the money of later investors while the scheme perpetrators pocket most of the money invested. The scheme collapses on itself as new investors stop joining and existing investors try to withdraw their investment.

3. Pump-and-Dump Scheme

The promoter builds up false hype on a stock they already own to attract investors to drive up the price of the stock. The promoter sells their shares at a profit and stops promoting the stock at which point the stock price plummets.

4. Pyramid Scam

This scam focuses on generating profits by recruiting other investors. Investors “buy” into the scam and then must recruit others to get paid back a “commission.” Pyramid selling or investing is illegal in Canada. It carries the double risk of making the victim also a perpetrator for attracting other participants.

5. Boiler Room Scheme

Most often run by a team of people who set up a makeshift office (the “boiler room”) from which they sell investments that usually don’t exist. Most often today, the boiler room is merely a website to validate a non-existent business. Any money invested is lost.

6. Current Event Scams

Fraudsters will use current news or global events to their advantage. For example, there have been many false claims for non-existent COVID-19 cures and fake pharmaceutical stocks to lure investors.

These are just a few of the most common and repetitive scams. There are new investment scams being devised by unscrupulous con-artists every day.

How To Avoid Scams

Don’t judge a book by its cover – con-artists are very good at making frauds look like legitimate investment opportunities.
Do not commit to anything without consulting a trusted financial professional.
Only purchase investments through licensed investment professionals.
Never trust “hot tips” or “insider information.”
Don’t be rushed – be suspicious of phrases like “act now” or “act before it’s too late.”
Ask for documentation on any proposed investment.
Never rely only on a website or phone number provided by the seller as proof of validity of an investment opportunity – verify all information with a third-party.

If You Do Fall for a Scam

As soon as you realize you have been the victim of a scam, report it. Quite often, scammers rely on the victim’s uncertainty about the investment or their embarrassment at being conned. The sooner you act, the less you and others will lose. Contact the police and the Canadian Anti-Fraud Centre as well as your provincial or territorial Securities Commission.

Always Deal with a Trusted Financial Professional

The best way to avoid being the victim of an investment scam is to only deal with a financial professional who you already know or who has been recommended or vetted by a financial professional you know and trust.

This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.