By Jonathan Erbe

Historically scam artists have attempted to exploit the public’s concern toward health and societal predicaments. Fraudulent companies and scam artists take advantage of ill-informed investors who fail to catch the red flags of investment fraud. More recently, it is important for investors to protect themselves from investment scams seeking to profit from the public’s push to combat the Zika virus by doing their part to inquire into the source and validity of a company’s claims to be linked to the Zika industry.

Recently, the Securities and Exchange Commission (SEC) has issued an alert, warning investors that the recent “Zika crisis may give rise to investment scams.” The SEC’s Office of Investor Education issued the alert, warning of the potential risk of scams to investors due to the possibility of companies falsely reporting an association to products and services used to combat the Zika virus. The Financial Industry Regulatory Authority (FINRA) also shared this alert on its site, providing excellent tips to avoid a scam. The SEC and FINRA recommend extensively researching the issuer, its claims, and the security itself in order to avoid a potential scam.

The SEC and FINRA suggest that investors:

• Heavily scrutinize any potential investments purporting to have a connection to the Zika virus industry. To obtain information on Zika treatments and products, investors should visit the Center for Disease Control, Food and Drug Administration, and other health and drug institutions’ websites to verify the information circulated by the issuer. Note whether the recommending company has been the recipient of SEC disciplinary action. To verify whether a particular offering is even registered with the SEC, use the EDGAR database found at https://www.sec.gov/edgar.shtml. If the offer is not registered with the SEC, check to see if it is registered with the state’s securities regulator.
• Be suspicious of unregistered investment professionals, as these are more often than not associated with a fraudulent entity promoting a scam. To check the registration status of an individual or company recommending any type of investment it is best to use the SEC’s Investment Advisor Public Disclosure database, available at investor.gov.
• Be wary of false information and companies, or individuals, promising high returns with no risk. All forms of investment carry a degree of risk. A high return has a strong correlation to higher risks, necessary to earn the possibility of such a return.
• Finally, it is important to be vigilant against unsolicited electronic communications making such promises, especially if such communications suggest that the information is only be provided to a select group of investors. Particularly with Zika investments, be aware of the fraudulent technique referred to as a “pump and dump.” This involves a fraudulent circulation of positive rumors to inflate a stocks value and entice buyers. However, these values rapidly depreciate after the rumors are dispelled and the promoters of the rumors “dump” their stock, leaving investors with worthless shares.

You can view the full alert issued by the SEC here.

By Kyle Butz and Ashley Morales

It is easy to see why a security-backed line of credit (“SBLOC”) would appeal to people that need money fast. SBLOCs use assets held in one’s brokerage account as collateral and allow the investor to borrow money in the form of a line of credit. Firms market these loans as an easy and inexpensive way to obtain cash without having to liquidate their investments. Firms frame these loans as an attractive way to access capital when the market is doing well; however, market volatility can actually increase potential losses.

Unlike most loans, there are minimal restrictions as to how the SBLOCs may be used. Most SBLOCs only restrict the use of credit for trading securities. This provides the investor an enormous degree of flexibility. Many SBLOCs allow for an investor to borrow between 50% and 95% of the value of their underlying securities. Interest rates are typically lower than those found on a personal loan. Lenders will frequently even forego a credit check; the line of credit is issued solely on the merits of the underlying assets.

However, there are significant risks that an investor must be aware of before applying for an SBLOC. The Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) have issued an investor alert regarding these lines of credit and strongly advise that investors consider the risks before opening an SBLOC. The primary risks include: variable interest rates which may even change daily, portfolio losses which adversely affect the investor’s line of credit and could result in the sale of the securities and subsequently tax consequences, and transferability issues. It is difficult to switch brokerage firms when an investor has an SBLOC. Generally, the investor will need to pay off the entire balance of the line of credit before transferring firms.

SBLOCs may be a great way to quickly and easily access money, but it is important to take the time to understand the risks and get answers to important questions about your account before assets are put forth as collateral. Investors should engage in extensive conversation and research prior to taking out an SBLOC.

For more information on Securities-backed lines of credit and their advantages and risks or for more information on this topic, please visit FINRA’s website.