The SEC recently issued an investor alert to warn investors about potential fraudulent investment schemes involving popular social media sites such as Facebook, YouTube and Twitter, turning its eye towards investor fraud perpetuated via social media. The alert, issued by the SEC’s Office of Investor Education and Advocacy, provides five tips to help consumers recognize and avoid investment fraud, easily made anonymous online, using social media websites and services: (1) be wary of unsolicited offers to invest; (2) look for “red flags,” e.g., offers that sound too good to be true or that “guarantee” returns; (3) look for “affinity frauds,” which are “investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly or professional groups;” (4) be thoughtful about privacy and security settings; and (5) ask questions and investigate investment opportunities thoroughly. The alert also describes common investment scams that have used social media and the internet to gain traction, including “Pump-and-dump” schemes, fraudulent “research opinions” or “investment newsletters,” high-yield investment programs, and offerings that just fail to comply with applicable registration provisions of the federal securities laws.
This alert came just days after the SEC’s Enforcement Division announced charges against two India-based operators of a purported alleged high-yield investment scheme that allegedly sought to exploit investors through pitches made on Facebook, YouTube, Twitter and Google+. According to the SEC, Pankaj Srivastava and Nataraj Kavuri, posing as “Paul Allen” and “Nathan Jones,” with a phony Seattle-based company address, used these sites to lure users into investing with Profits Paradise. Their posts on social media websites allegedly offered investors “guaranteed” daily profits, that were “huge,” “lucrative,” and “handsome,” with only a “minimal” risk.
Along the same lines, at the 15th Annual “Live from the SEC” conference held a day later on November 13, 2014, Commissioner Kara M. Stein gave remarks on capital formation, and in particular, equity-based crowdfunding, which brings investors and businesses across the globe together, enabling small businesses to secure capital in exchange for equity (as opposed to debt-based crowdfunding through peer-to-peer lending or reward and donation-based crowdfunding). She noted that while crowdfunding is a significant tool, using the power of the internet to gather financial support also creates significant risks because it involves the broader international community. Among other challenges, the SEC may need to deal with the implications of crowdfunding investment opportunities initiated abroad that target U.S. investors. Their interactions with other countries’ regulations on pooled funds and cross-jurisdictional barriers may make prosecution and enforcement of U.S. securities laws and regulations difficult.
It appears that the SEC will continue to carefully monitor and navigate the ever-expanding world of pitches and advertisements made to potential investors through social media and networking websites. For now, only one thing is fairly certain: if an investment opportunity is simple enough to explain in a 140-character post, it’s likely worth a closer look.