Opening the Floodgates on Hedge Funds

Thanks to the JOBS (Jumpstart Our Business Startups) Act, signed by President Obama in early 2012, the Securities and Exchange Commission (SEC) lifted advertising restrictions for hedge funds and other kinds of private investment offerings beginning in 2013, allowing for the direct solicitation to individual investors.

The goal of the JOBS Act was to make it easier for small businesses to raise money, thereby creating more jobs. Part of the act lifts a 70-year-old mandate where hedge funds and private equity groups could only solicit investors with whom they had a preexisting relationship with and were prevented from advertising directly to individual consumers. Relaxing the mandate opens the market for any fresh investment money, despite the somewhat ambiguous requirement that you be an “accredited investor” to participate. Hedge funds and private equity groups can able solicit directly to potential investors of all financial standings.

So what does this mean for the average consumer looking to invest? Under Title III of the JOBS Act, anyone with a net worth below $100,000 can buy shares in privately held companies seeking to raise up to $1 million over a 12-month period. Consumers need to be mindful of the potential for investment fraud via social networks. Irresponsible and under-regulated opportunists can take advantage by approaching the under educated consumer who has pipe dreams of large returns on his few thousand dollars.

One avenue for potentially unscrupulous solicitation via social networks is called “Crowd Funding” (aka Crowd Financing). It originally began as an online way to build capital for special projects such as paying for large medical bills, raising money for a charity, or artistic projects. Crowd funding allows a diverse range of people to contribute small or large amounts toward a larger goal. It has also been a popular way for campaigns to raise funds for their candidates. With the JOBS Act, investors can set up a page on a crowd funding site and directly sell small amounts of equity to a multitude of investors.

To help protect investors from potential fraud, the following tips can help:

  • Although they can advertise to consumers, hedge funds are required to accept only serious “accredited investors,” having at least $1 million in liquid assets, or a $200,000 annual income for an individual or $300,000 for a couple. If you don’t meet the criteria, then you are legally prohibited from hedge fund participation.
  • Always check the broker’s background. Each broker must be registered with the SEC in its state and with the Financial Industry Regulatory Authority. Visit North American Securities Administrators Associationselect the NASAA Fraud Center under Investor Education, and click on “How to Check Out Your Broker or Investment Adviser.”
  • Beware of offerings that seek investments immediately. Investors will be taking on a very high risk, even for legitimate solicitations since about 50 percent of all small businesses fail within the first five years.
  • Issuers using funding portals to raise money may be inexperienced. Their track records may be unproven, unsubstantiated, or outright fraudulent. Request full and complete disclosure beyond what is available on a website.
  • Social media sites are a targeted connection point. You may be savvy, but your friends and families may not be. They may innocently forward you a link or application to try via a new social media networking site, and your computer could inadvertently become infected with malware or a virus. As a user of Facebook, LinkedIn, and other social networks, be absolutely vigilant about what you necessarily need to communicate here and skip all the extras that compromise your security.
  • Crowd funding portals claiming an accreditation or “seal of approval” from a standards program or board may not be legitimate. Funding portals must be registered with the SEC, belong to a self-regulating organization (SRO), and comply with other rules the SEC may issue.

As a general rule, remember: Nothing beats good old common sense when it comes to your money. Even though Bernard Madoff took advantage of thousands of unknowing victims, there were many who considered his offer “too good to be true” and avoided the Ponzi schemes that destroyed so many.

Keep these points in mind, and you should remain at ease with your investment choices.

Cynthia Hetherington, MLS, MSM, CFE, CII is the founder and president of Hetherington Group, a consulting, publishing, and training firm that leads in due diligence, corporate intelligence, and cyber investigations by keeping pace with the latest security threats and assessments. She has authored three books on how to conduct investigations, is the publisher of the newsletter, Data2know: Internet and Online Intelligence, and annually trains thousands of investigators, security professionals, attorneys, accountants, auditors, military intelligence professionals, and federal, state, and local agencies on best practices in the public and private sectors.

 

2018-12-14T11:17:52+00:00 December 19, 2018|Tags: , , , , , |