By Andy Tiwari
Have you noticed Internet ads for “Investor Needed,” “Partner Needed,” or “New Invention?” These ads typically pitch investment in a new product, a “sure-to-be-profitable” business, or real estate. Entrepreneurs who’ve cashed in on good ideas are popular thanks to shows like “Shark Tank.” While fears of the stock market linger, the average consumer with a little extra cash might be tempted to fund the “next big thing.”
Does anyone really use the Internet to find investments? The numbers don’t lie: projects abound on Kickstarter and IndieGoGo; and a recent informal survey of two weeks’ worth of Craigslist ads in San Antonio showed more than 100 posts seeking investors (for everything from a new food idea to oilfield equipment). Some might be legitimate, but many aren’t, and novice investors often skimp on proper evaluation.
For instance, a client recently received a default judgment against a guy soliciting funds for a bar through Craigslist. It was determined that the “bar owner” had taken around $90,000 from multiple people, using the same documents and offering the same promise of profits to each person. The bar never opened, and records show the scammer probably didn’t own the “bar” before pitching the idea, something the investor could have known from a simple public record search.
Craigslist is aware of similar problems, and the company warns users against “third-party guarantees.” Technically, business interests like stock or partnership units can’t be sold unless they’re registered with the Securities and Exchange Commission or meet a legal exception. But basic warnings are all that most sites provide, and the Internet’s mantra is “buyer beware.” Additionally, many professionals argued that antiquated rules on private investment were too strict, stifling creativity. This movement coupled with the popularity of “crowdfunding” has caused the SEC to loosen its rules on private investing.
These changes will inevitably increase the number of available offers and might make it increasingly difficult to sift scams from genuine projects. While professional guidance is best, consider these precautions when evaluating private investments:
Check public records. Real estate ownership is public, typically recorded in the county where the business is located. If the property is owned by a business entity, that entity should be registered with the Secretary of State and in good standing. Businesses that require licenses/permits – like bars – can be verified with the state. See if the seller has a criminal history or lawsuits against them. Most of this information is available for free online or by contacting state agencies.
Verify the numbers. Most for-profit businesses pay sales and federal tax and should have tax returns. Focus on whether sales records are accurate and whether all potential problems are being disclosed (it’s even possible to ask the state whether sales taxes were paid). New ventures might not have past numbers, but do the proposals make sense? Can the business really sell 500 pizzas per day or is that “pie in the sky?” Don’t be blinded by “potential profit.”
Check it out. Any “seller” should be willing to let you tour and observe the business or real estate – or evaluate a potential product – sometimes in exchange for you signing a non-disclosure or similar document. Visit retail establishments multiple times and at different times of the day. If stock is being sold, ask for information on compliance with SEC and state rules.
Pay…later. If a seller wants proof of your finances or income, you can provide a line of credit from your business lender or proof of funds at an escrow agent. But never offer funds directly to the seller until you’ve done your due diligence.
Report scams. If you fall victim to a scam, the FBI and National White Collar Crime Center have created the Internet Crime Complaint Center, www.ic3.gov, where you can share details of the incident and file a complaint. If someone is unlawfully attempting to sell shares of a business venture in Texas, contact the Texas State Securities Board at http://www.ssb.state.tx.us.
As Bernie Madoff proved by pulling off one of the largest financial frauds in U.S. history, even a savvy investor can be convinced to disregard better judgment and common sense in the pursuit of profit. If you don’t hire professional help, at least do your homework.
If you need legal advice, schedule a meeting with Tiwari + Bell PLLC through our website or by calling (210) 417-4167.