State regulators name top offerings likely to hurt investors in 2015
NASAA calls binary options, stream-of-income and marijuana schemes emerging investor threats.
Investments in risky options contracts, pension or disability payments, the marijuana industry and digital currencies are new kinds of offerings likely to hurt investors in 2015, state securities regulators said Wednesday.
The North American Securities Administrators Association identified the emerging dangers in a statement that also highlighted “persistent threats,” such as private securities offerings, pyramid and Ponzi schemes, real-estate offerings, affinity and Internet fraud, and oil and gas investments.
“Many of the top threats facing investors involve new products in classic schemes,” William Beatty, Washington state securities director and NASAA president, said in a statement. “Regulators are seeing classic threats to investors morph into new or altered dangers, many fueled by the Internet. Overarching all of these threats are unlicensed agents selling unregistered products to unsuspecting investors.”
One of the new dangers is binary options, which are options contracts that pay out a predetermined amount of money if the underlying assets increase in value, or give no payout if the underlying assets decrease.
“Particular investor risks are that the option is an all-or-nothing payout structure and investors can easily lose their entire investment,” NASAA said.
With marijuana now legal in 23 states and the District of Columbia for medicinal use and in four states and Washington for recreation, the substance is attracting the attention of investment fraudsters who engage in “pump and dump” rip-offs.
“Many of these companies are micro-cap companies selling low-priced securities which typically are highly speculative and carry a high degree of risk for investors,” NASAA said.
Another new threat is so-called stream-of-income investments, where investors “buy” monthly pension or disability payments from individuals.
“Sales of these investments are of concern to state regulators because often veterans and disabled persons are preyed upon to assign their benefits when they experience financially stressful times, selling much-needed future benefit payments at a significant reduction,” NASAA said.
The growing acceptance of digital currency also presents pitfalls for investors.
“Unscrupulous promoters may be attempting to capitalize on this popularity by illegally offering securities tied to digital currencies,” NASAA said.
Last week, NASAA released a report on 2013 enforcement statistics. State regulators undertook 2,184 enforcement actions, ordered $616 million in investor restitution, levied $75 million in fines and penalties, and meted out 1,816 years in jail time.
The report also showed that enforcement actions against registered broker-dealers increased 89% in 2013 to 357, from 189 in 2012, while enforcement actions against licensed investment adviser representatives jumped 11% to 176, compared with 158 in 2012.
The increase in actions against registered financial advisers is due in part to the switch of advisers with less than $100 million in assets under management from Securities and Exchange Commission regulation to state oversight.
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