Investing Safely Using the Internet
The Internet can be a place where con artists can take advantage of unwary investors. But it can also help you find the information you need to avoid fraud and find sound investments.
Using the Internet to Invest WiselyIf you want to invest wisely and steer clear of frauds, you must get the facts. Never, ever, make an investment based solely on what you read in an online newsletter or bulletin board posting, especially if the investment involves a small, thinly-traded company that isn't well known. And don't even think about investing on your own in small companies that don't file regular reports with the SEC, unless you are willing to investigate each company thoroughly and to check the truth of every statement about the company. For instance, you'll need to:
- get financial statements from the company and be able to analyze them;
- verify the claims about new product developments or lucrative contracts;
- call every supplier or customer of the company and ask if they really do business with the company; and
- check out the people running the company and find out if they've ever made money for investors before.
Always watch out for tell-tale signs of fraud.
Here's how you can use the internet to help you invest wisely:
Start With the SEC's EDGAR Database
The federal securities laws require many public companies to register with the SEC and file annual reports containing audited financial statements. For example, the following companies must file reports with the SEC:
- All U.S. companies with more than 500 investors and $10 million in net assets; and
- All companies that list their securities on The Nasdaq Stock Market or a major national stock exchange such as the New York Stock Exchange.
Anyone can access and download these reports from the SEC's EDGAR database for free. Before you invest in a company, check to see whether it's registered with the SEC and read its reports.
But some companies don't have to register their securities or file reports on EDGAR. For example, companies raising less than $5 million in a 12-month period may be exempt from registering the transaction under a rule known as "Regulation A." Instead, these companies must file a hard copy of the "offering circular" with the SEC containing financial statements and other information. Also, smaller companies raising less than one million dollars don't have to register with the SEC, but they must file a "Form D." Form D is a brief notice which includes the names and addresses of owners and stock promoters, but little other information. If you can't find a company on EDGAR, call the SEC at (202) 551-8090 to find out if the company filed an offering circular under Regulation A or a Form D. And be sure to request a copy.
The difference between investing in companies that register with the SEC and those that don't is like the difference between driving on a clear sunny day and driving at night without your headlights. You're asking for serious losses if you invest in small, thinly-traded companies that aren't widely known just by following the signs you read on Internet bulletin boards or online newsletters.
Contact Your State Securities Regulators
Don't stop with the SEC. You should always check with your state securities regulator, which you can find on the website of the North American Securities Administrators Association, to see if they have more information about the company and the people behind it. They can check the Central Registration Depository (CRD) and tell you whether the broker touting the stock or the broker's firm has a disciplinary history. They can also tell you whether they've cleared the offering for sale in your state.
Check with Broker Check
To check the disciplinary history of the broker or firm that's touting the stock, use NASD's BrokerCheck website, or call NASD's BrokerCheck Program hotline at (800) 289-9999.