Ever since the Internet became a medium for communication, fraudsters and scammers have tried to use it to steal money from overly-trusting individuals. When it comes to the sale of securities, the SEC warns that fraudsters commonly try to trick investors through online investment newsletters, bulletin boards, and pump and dump schemes.
Fraudulent online offers of securities are a commonly used scam because the promise of receiving a return may blind the investor to the holes in an otherwise reasonable sounding proposal. For example, online investment scammers can take advantage of cognitive biases that will make their proposal sound even better merely because a similar topic has recently been in the national news.
The North American Securities Administrators Association Enforcement Section cautions that Internet offers of securities continue to be a top investor threat.
Securities crowdfunding is significantly different from some of the other Internet offerings because of the investor protections that are baked into the laws that permit crowdfunding. The statutory requirements of the JOBS Act and regulations from the SEC should help keep out proposals that are purely fictitious scams. Nevertheless, you can still be defrauded by half-truths and overpromising. So, before subscribing to a crowdfunding investment offer, keep in mind a few useful research tips:
- Be Aware of Your Confirmation Biases: Confirmation bias refers to the tendency to search for or interpret information in a way that confirms preconceived ideas. Smart investors recognize this bias in their decision-making and gather information that challenges their preconceptions. Investors can also counter their confirmation bias by only investing in industry sectors in which they are knowledgeable about the risks and business opportunities, rather than relying on gut feelings.
- Use Your Critical Thinking Skills: Critical thinking is the practice of reflective reasoning about beliefs and actions. When it comes to investing, this boils down to understanding what you are investing in, and whether the goal of the capital raise makes sense for this type of company. For instance, start-up companies have a high rate of failure; even a well thought-out plan for using capital from the securities offering likely will not result in success. Critical thinking allows the investor to accurately gauge the risk of this investment.
- Differentiate Good Sources from Questionable Ones: Not all sources of information are created equal. Across the Internet, many authoritative looking sources are merely dressed up press releases or easily manipulable ranking systems. As an investor, be aware of the relationship between the information source and the subject, and be cautious of third parties that merely repeat back the company's information.
Be skeptical, think critically, and utilize good sources to research your potential investments. Investors who do these things will be better able to avoid the pitfalls of scams and fraud in online investing.