How to Spot if Investors Are Fake

Many startup founders have encountered investors who don’t live up to their promises; learn to recognize red flags and identify potential scammers.

Investment scams typically promise high returns with minimal risk and contact their victims via email, text message or WhatsApp groups without prior permission. Watch out for messages encouraging you to keep the investment secret or discouraging calling the firm directly.

Unsolicited Approaches

Small business owners’ hopes and aspirations may include being approached by Sergei Brin and Larry Page from Google with a cheque in hand; however, unsolicited acquisition approaches from private equity or trading companies are common and may come through social media posts, emails, texts or encrypted group chat (such as WhatsApp).

Unsolicited approaches should always be treated with suspicion as they often involve hasty conversations and demands for exclusivity before you have fully considered all aspects of the situation. Therefore, it is always advisable to run a formal sale process that allows you to compare offers from multiple buyers as well as seeking independent advice prior to engaging with any investor.

Unstable Relationships

Investing can be like being in an unstable relationship. Unstable relationships – both personal and professional – can cause feelings of insecurity, stress and depression as well as leading to decisions which wouldn’t normally be considered under normal circumstances. Likewise, investing can be similar. It requires making many irrational choices you would never consider otherwise.

Be wary of fraudulent investors on social media who claim to be brokers or investment advisers. Bad actors may use slight variations of real information sources by adopting their account name, profile name or handle for online information sources claiming to be genuine brokers or investment advisers. They could also post comments that link back to an impostor website intended to steal investor credentials or money.

Testimonials and celebrity endorsements can also be an indicator of fraud. Be wary of being taken in by false testimonials or celebrities being paid to promote investments.

Guarantees

Scammers use fraudulent websites to gather sensitive data, including login credentials. Scammers then use this data to steal funds from investors. Be wary of companies offering guarantees to invest, unregistered products and high returns; also be wary if their message asks you not to discuss or discuss publicly their offerings; be wary if a firm asks you not to discuss its investment – reputable firms should have established offices and official communication channels.

Fraudsters may use social media platforms such as Facebook or Twitter to advertise investment opportunities, using fake profiles or handles that pose as brokers or market sources. Watch out for any slight variations in account names, profile pictures, email addresses or screen names that might signal fraud; suspicious posts about listed stocks might also serve as clues.

Lack of Documentation

If someone attempts to sell you an investment without providing documentation that you can independently verify – such as account statements, prospectus or offering circular – it should raise red flags. They could be trying to avoid leaving a paper trail of their illegal activities behind by starting negative rumormongering campaigns so they can purchase shares at artificially low prices. Furthermore, microcap stocks and penny stocks are particularly susceptible to market manipulation and other forms of fraud.

Imposter scams often involve falsified registration documents, like a public FINRA BrokerCheck report for an investment professional who does not exist. Look out for slight variations and typos in an investor’s name, profile, email address or screen name to detect impostors.

Lack of Communication

Businesses rely on effective communication to thrive; what may not be so well known, however, is how inadequate communications can cost companies of all sizes an enormous sum of money.

Fraudsters often spread false information via social media platforms by masquerading as brokers, investment advisers or other sources of market information. Be wary of any new posts on your wall, tweets, direct messages or emails (even those sent by friends) promoting a certain stock.

Look out for any slight variations or typos in account names, profile names, email addresses, screen names or handles. Furthermore, verify the source by directly reaching out to the company (using SEC filings as reference points for contact info and website addresses) while being wary of testimonials or celebrity endorsements as these can often be false leads.


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