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Top Investment Threats In 2015: What Investors And Financial Professionals Need To Know

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George Miller

If you invest in stocks or work in the financial services industry, chances are 2014 was a pretty good year for you. The S&P 500 and Nasdaq posted gains of 11.4% and 13.4%, respectively, while the Dow finished the year up 7.5%. In a bull market such as that we have seen over the past five years, it may be tempting to invest in new or emerging financial products either to leverage growth or to diversify. But with the threat of higher interest rates, falling oil prices, a European recession and slowing growth in China, the question of when, not if, the market will experience at least some level of decline remains. Given the increased availability of non-traditional investments, the potential negative impact a market correction could have on both investors and financial professionals, who may face potential liability for recommending these investments, is severe.

There are, of course, situations where alternative investments make sense, as each investor has a different objective, risk tolerance and sophistication level. We believe the following products and schemes are, however, some of the top threats to investors and financial professionals in 2015.

Private Placement Investments. A private placement involves the sale of unregistered securities to a small number of accredited investors (e.g., sophisticated investors such as banks, investment companies and individuals with a net worth over $1,000,000 or who earn at least $200,000 per year). Private placements, sometimes called Regulation D or Rule 506 investments, typically are used in real estate investments or as a tool for small businesses — usually emerging growth companies — to raise capital. These securities are highly illiquid as they generally cannot be resold on the open market. Moreover, financial information traditionally available to prospective investors often is not available in a private placement. While companies historically could not advertise private placements to the general public, the Federal government’s 2012 Jumpstart Our Business Startups (JOBS) Act relaxed those rules, meaning more non-accredited investors are being exposed to private placements. There may be situations where a private placement makes sense, but investors and financial professionals should be vigilant before investing in or recommending a private placement.

Internet-based Securities Crowdfunding. The JOBS Act also established a "crowdfunding exemption" to the registration requirements of the Securities Act of 1933. Title III of the JOBS Act will allow companies to raise up to $1 million in investment capital per 12 month period from everyday (e.g., non-accredited) investors. While crowdfunding will allow businesses easier access to startup capital, investors will not have the benefit of reviewing all the financial and other company information they otherwise would have in a traditional investment scenario. And because securities crowdfunding — which the SEC considers amongst the riskiest investments available — will take place almost exclusively through online funding portals, investors may be more vulnerable to fraud. Critically, the SEC has not yet approved the rules governing securities crowdfunding, and it remains illegal in California.

Binary Options. A binary option, also referred to as an "all-or-nothing option" or "fixed-return option," is a type of option in which the payout depends entirely on the outcome of a yes/no proposition. The yes/no proposition typically is the price of a particular stock — e.g., whether XYZ stock will be at or above a set price in X days. Unlike traditional options, however, the holder does not have the right to purchase or sell the underlying asset and either will receive a pre-determined payout (assuming the condition occurred) or nothing at all. Legitimate binary options may make sense for certain investors. According to regulators, however, a large percentage of binary option trading takes place through unregulated, internet-based "brokerage firms" that may or may not be complying with U.S. regulatory requirements.

Oil and Gas Ventures. Whether the price of oil is up or down, investors and financial advisers should exercise caution when considering alternative/private placement investments in oil and gas companies. There has been a recent explosion of non-traditional investments in hydraulic fracturing ("fracking") and horizontal drilling companies, and fraudsters and scam artists have capitalized on the public’s increased awareness of these new oil and gas extraction methods. Regulators expect to see an increase in enforcement actions involving fraudulent oil and gas investments in the coming year.

Ponzi Schemes. One of the oldest tricks in the book is still one of the most common. The classic Ponzi scheme involves the payment of "returns" to existing investors using capital raised from new investors, rather than by earning any actual profit. Investors are typically lured into Ponzi schemes through promises of guaranteed annual returns that seem almost too good to be true. Ponzi schemes are increasingly being promoted through the internet and through "affinity" networks, such as churches, clubs, ethnic and cultural groups and other relationships that give a prospective investor a feeling of familiarity and security. There are a number of resources available to investors to investigate whether an investment adviser or company is legitimate, including FINRA’s BrokerCheck system(1) and the SEC’s Investment Adviser Public Disclosure Database.(2) If it sounds too good to be true, however, it probably is.


About Shustak & Partners, P.C. – Business & Securities Lawyers: Shustak & Partners, P.C., is an AV-rated law firm with offices in downtown San Diego, Irvine, San Francisco and New York. We represent broker-dealers, registered investment advisers, brokers, publicly traded companies, local businesses and high-net-worth individuals in a wide variety of business, securities and financial disputes, including securities and financial fraud claims, breach of contract claims, complex employment disputes and FINRA and SEC investigations and enforcement proceedings. We also have extensive experience handling intellectual property, trademark and copyright disputes. Our attorneys routinely appear in state and federal courts throughout the United States and before the American Arbitration Association (AAA), FINRA Arbitration Division, National Futures Association, JAMS, International Chamber of Commerce and other forums throughout the country and around the world. Call us today at (619) 696-9500 for a confidential analysis of your situation and visit our website, www.shufirm.com, to learn more about our firm’s accomplishments and credentials.


(1) www.finra.org/Investors/ToolsCalculators/BrokerCheck/

(2) www.adviserinfo.sec.gov/IAPD/Content/IapdMain/iapd_SiteMap.aspx

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