If it seems too good to be true, it probably is. Investment scams prey on the desire to make money without too much risk or initial funding.
Investment scams take many forms, but all prey on the desire to make money without much risk or initial funding. They are often complex cons involving detailed stories. It can sometimes take years to realize you’ve been scammed. Even savvy investors fall for investment scams. Con artists are masters of persuasion, and they often learn the weaknesses of their targets and tailor their pitches accordingly.
How the Scam Works:
In the most basic version of the con, the scammer convinces you to “invest” in a project, company, loan, or other initiative. You may even receive regular reports that the project is producing great returns. But when you try to withdraw your money, it turns out the investment never existed.
Another common investment con is a pyramid scheme or Ponzi scheme. You buy into a company where the profit doesn’t depend on the sale of the product, but on bringing in new investors. It’s mathematically impossible for these set-ups to continue indefinitely. Eventually the pyramid collapses.
Tips to Spot This Scam:
- Be very wary of buzz words. Certain phrases should raise a red flag for an investment opportunity. Don’t believe anything that is “guaranteed” to do well, or that offers low or no risk with a high return. Pyramid schemes (even if they are not called that) require you to bring in other investors in order to recoup your initial investment.
- The investment industry is highly regulated. Be wary if investments are unregistered with the SEC or other investment industry regulators. Also, check licensing for the sellers.
- High-pressure sales tactics are also a big warning sign. Many risky investments are sold at “opportunity meetings” or other high-pressure situations. A similar tactic is the use of a “shill,” a decoy who offers a fictional success story but is really being paid by the promoter of the plan. Some pitches leverage a shared connection such as the same ethnicity, church, profession, etc. Be on the lookout for attempts to prey on an affinity.
- How do you make money? If you find that the reward for recruiting new distributors and selling them products and training materials is more than the reward for selling products, you may be dealing with a pyramid scheme.
- Chain letters are also illegal. A chain letter may seem like harmless fun. Is sending $5 (or a book or small gift) with the hope of receiving the same from other participants that big a risk? It may not seem like a big deal, but any chain letter that has you sending money or other items of value through the mail with a promise of a return on this “investment” is illegal in the United States and Canada. Also, if you participate in email chain letters, you could be spreading a virus or other malware to all the people you are emailing.
To report a scam, go to BBB Scam Tracker.
To learn how to protect yourself, go to “10 Steps to Avoid Scams”.
Last Reviewed: March 1, 2017