NASAA Identifies New Products in Classic Schemes as Top Investor Threats

By Patricia Uceda, Fall 2014 Graduate Research Assistant

tideThe North American Securities Administrators Association (NASAA) recently identified emerging threats that investors will likely face in 2015. Many of the treats involve new products being sold in classic schemes, often fueled by the Internet. A common theme among all these threats are unlicensed agents selling unregistered products.

The following are the top four emerging threats facing investors in America that have been identified and compiled by NASAA. They include binary options, marijuana industry investments, stream-of-income investments, and digital currency and cybersecurity risks. In order to guard against these threats, NASAA is reminding investors to be cautious and to always investigate before investing.

Binary Options

Binary options are securities in the form of options contracts in which the investor either gets a set payoff or nothing at all depending on whether the underlying asset increases or decreases in value. The binary option will pay a fixed sum at expiration regardless of how much the asset has increased.

Risks involved with binary options include illegal distributions that do not comply with registration or distribution requirements, fraudulent promotional schemes, identity theft, refusal to pay out investor funds, and potential for abusive trading. Additionally because the option is an all-or-nothing payout, an investor can easily lose their entire investment.

Marijuana Industry Investments

Currently, medical marijuana is legal in 23 states and the District of Columbia, and recreational use is legal in four states and the District of Columbia. Many have seized upon this new market by selling investments in the marijuana industry. These include investments in companies that provide products to the marijuana industry such as vaporizers, hydroponic supplies, and lighting systems.

However, scam artists have also recognized an opportunity to profit from this new market. Specifically, NASAA is concerned with the many small micro-cap companies that have sprung up selling low-priced securities that are highly speculative and carry a high degree of risk. These types of micro-cap securities are highly susceptible to pump-and-dump schemes, and securities regulators are seeing increasing instances of these schemes with these micro-cap offerings.

Stream-of-Income Investments

Companies have been increasingly selling streams of income, such as pension payments or government disability payments, to investors looking for steady monthly returns. These investments are extremely risky because laws may prohibit the assignment of the stream of income, and the seller usually has the legal right to redirect the payment back to themselves. If the seller does redirect the payment, the investor will be left with an unenforceable contract right. In addition, these benefits are contingent on the life of the seller. As a result, investors should proceed cautiously when deciding whether to invest in the purchase of another person’s stream of income, and should always check their local securities regulator to confirm that the investment and the person selling it is properly registered.

Digital Currency & Cybersecurity Risks

Lastly, as we mentioned earlier, digital currencies such as Bitcoin are becoming an increasingly common means to pay for goods and services. As a result, there is an emerging market for securities offerings tied to digital currencies. Unfortunately, there is always the potential that promoters may be making fraudulent claims, especially since this is a relatively new market with which investors are not as familiar. In addition, even legitimate securities offerings tied to digital currencies can pose risks such as volatility and demand for the units, anonymity associated with the use of certain digital currencies, and the threats posed by hackers using malicious software to hack network security systems.