How to Tell if an Investment Opportunity is a Scam

I often meet with people who are considering a business opportunity, who do not realize that the opportunity is actually a scam.

In my position as a business attorney, I have many opportunities to see legitimate successful businessesand scams promoted as business opportunities.

The list below provides a number of factors to help consider whether a business opportunity is actually a scam. The more of these factors are present, the more likely it is a scam.

Evaluating whether an Investment Opportunity is a Scam

The business that you are entering into…

  • Promises exceptional returns that are not available anywhere else in the market
  • Tells you that you are a select group who qualifies for this investment (e.g. Christians, churches, veterans, seniors, living in a certain area, etc.)
  • Shows immediate returns, which most people decide to reinvest (Read more about how Ponzi Schemes work. The SEC also has a helpful guide on Ponzi Schemes.)
  • Encourages you to sign up friends and family
  • Does not actually provide a product or service, but instead takes advantage of some loophole in the system, arbitrage, or related technicality to make money
  • Is operated by a privately held company rather than a publically traded company
  • Has testimonials and industry credentials that can be manufactured
  • Is promoted by a company who advertises online, on late night radio, on late night TV, or in other get-rich-quick places
  • Is shared by people who could make much more money keeping it confidential and using it themselves, but instead purport to have some desire to share wealth with others
  • It seems too good to be true

Great Investments Don’t Need Average Investors

Legitimate business owners don’t seek out average people for investing. They seek out “angel investors” (savvy business people with substantial amounts of money), venture capitalists, or banks. Think about it: if you wanted to raise a lot of money, it would be more efficient to raise it from one or two people than many people.

Government Strictly Regulates Advertising Investments to the Public

Also, “blue sky laws” in the United States are very strict about advertising for investors. Legitimate business opportunities have lawyers who advise the businesses of the strict regulations on advertising investment opportunities for investors.

Scams are Often Promoted by Good People

One objection people involved in scams have told me is that they have family members or friends involved in the investment, so it must be legitimate. From my experience, most scams have a couple scam artists at the top, and most of the operation is run by trusting, good people who have no idea the operation is based on a scam. Some even have a president and officers who think the investment is legitimate, but a scam artist behind the scenes is actually the one who built the scam. The scam artist uses the integrity and persuasiveness of those operating the business to bring in other investors.

Get Professional Advice Before Investing

If you are considering an investment opportunity that fails to pass any of the factors above, you should consult with an experienced business attorney who can determine if it is a legitimate business investment or a scam.