By Andrea Nickerson
On September 29, 2014, the Securities and Exchange Commission (“SEC”) announced the discovery of a probable fraudulent investment scheme in South Florida. Two Miami Beach men allegedly raised more than $5.7 million in capital from a mere 100 investors for a purported startup television network and production company called Vision Broadcast Network.
Like many similar schemes, the men provided investors with false financial statements, and even claimed that Michael Jordan was planning to invest in the company. Between 2007 and 2010, the company’s creators took more than $450,000 for undisclosed commissions, $1.3 million for nonexistent consulting services, and several hundred thousand dollars for personal expenses like luxury car leases and golf equipment.
The Vision Broadcast fraud demonstrates several themes in modern investments frauds. As the title of this blog alludes to, investing “in” today’s technology-driven society connotes more than a single common meaning. First, the phrase highlights the environment in which today’s investors receive most of their information and make their investment decisions. Technology provides investors with numerous resources for researching companies, investment strategies, securities products, and investment professionals. Investors can also easily supervise their investments and market performance in real time via computer, tablet, or mobile phone.
However, technology also provides cost effective and efficient mediums through which fraudulent parties can contact large pools of potential investors. Social media and websites can quickly and inexpensively be used to create a seemingly legitimate company in the matter of a few hours. Messages posted to investor online bulletin boards may also be used to conduct a scam. Investors may uncover these internet-based sources and reasonably think that a company like Vision Broadcast actually exists. Thus, investing “in” a technology-driven society in this sense presents some measure of both security and danger to investors.
Second, the phrase makes reference to the growing public interest in investing in the technology industry itself. The success of technology-based companies like Facebook, Twitter, Google, Apple, and Netflix has led many investors to speculate in hopes of profiting from the next billion dollar idea.
According to Heather Somerville’s article, “Silicon Valley tech companies reap record-level investments”, technology companies in California received more than $4.7 billion in venture capital in the first quarter of 2014 alone. This amount was nearly half the total invested in all industries by venture firms nationwide.
Although some start-up technologies companies are profitable, initial investment is very risky. Aside from the potential for fraud, these firms require high start-up costs and face extreme competition. The SEC warns, “Don’t invest in small, thinly-traded companies unless you’re prepared to lose every penny.”
Recently, the Investor Rights clinic assisted a client who was solicited to invest in a start-up biodiesel energy and aqua-farming company located in California. The company did not provide any financial information, prospectus, or account statements, but promised substantial returns due to the high demand of the industry. Unfortunately, the shares issued by the company were not marketable, and the broker and brokerage firm that solicited the sale could no longer be located.
Because of the increasing occurrence of technology-related scams, investors need to be diligent in researching securities and the people or companies recommending them. In the SEC’s Avoiding Internet Investment Scams: Tips for Investors, the Commission first recommends independently investigating the security and the person selling it to see if they are registered with the SEC, the Financial Industry Regulatory Authority (FINRA), or state authorities. Independent resources can also provide substantial information related to the performance and validity of the investment and related parties.
Second, the Commission warns against investments that sound too good to be true, and promise “guaranteed” or “risk-free” returns. Even the safest investments carry some risk. The Commission also advises investors to be on the lookout for common internet scams, including spam and “pump and dump” schemes.
As is evident, technology can provide both safeguards and pitfalls to investors. Further, the technology industry itself presents unique investment and potentially profitable opportunities. However, investing “in” a technology-driven society requires that, more than ever, investors are skeptical in their analysis of technology-based information and investments.