By Tosha Dunn, Spring 2016 Student Intern
I know why you’re here—you’re wondering what a nutraceutical is. Well, it’s a loosely defined food product category covering everything from energy drinks, garlic supplements, and the ever appetizing “functional food.” More generally, nutraceuticals include everything from vitamins, protein powders, and supplements of all kinds (fish oil, ginkgo, etc.). Most of the products considered to be nutraceuticals advertise as providing some sort of health benefit, like improved energy, memory, or weight loss. However, these products are regulated by the FDA and the FTC for contents and labeling, so they can’t promise immortality or the curing of a disease.
So the products aren’t necessarily snake oil, but some of the securities being offered by nutraceutical companies are. The scams associated with nutraceuticals are nothing new; in fact, they usually take the form of a “pump and dump” scheme. Generally, investors receive some sort of notice via mail, email, text, social media, blogs, or infomercials with a lot of tremendous promises about returns. FINRA provides an example of one notice that promised “813% short term gains.” 813%! I call this tremendous, but really, it’s completely unbelievable and should totally tip you off that something isn’t quite right with the stock. Besides massive returns, nutraceutical scammers may also invoke brand names to induce investors to purchase stock, like tying their outlandish claims of returns to statements like “our brand is competitive with Gatorade”.
FINRA suggests that investors protect themselves in a number of ways. First, these offers are generally unsolicited, so question why it has been sent to you—why would some stock broker with a hot tip decide to notify you? Further, don’t rely on a single source, like an offer, no matter how above board or professional it may appear.
Don’t just take the promoter’s word at face value — do some investigation:
- consider if the stock trades on a stock exchange or via over the counter markets (for OTC listed stocks, check FINRA’s OTC Bulletin Board),
- check if the company files with the SEC through the EDGAR system,
- look to see if the person selling the stock is properly registered (use FINRA’s BrokerCheck),
- look for any recent name changes or descriptions of the business (these can be determined from the company’s filings with the SEC),
- be a skeptic and scrutinize the company, the investment, and any promises being made
Lastly, for more in-depth information about nutraceuticals, The American Chemical Society provides Nutraceuticals Move In, which describes the products and their regulation by FDA and the FTC.