Fraudulent hedge funds pose greater threat in 2013, says Hetherington

The goal of the JOBS Act was to make it easier for small businesses to raise money, which would create more jobs and put people back to work.  As part of that act came the lifting of a 70-year old mandate where hedge funds and private equity groups could only solicit investors with whom they had a pre-existing relationship with and were prevented from advertising directly to individual consumers. Relaxing the mandate will open up the markets for any potential investment money, despite the requirement that you need to be an "accredited investor" in order to actually participate, and hedge funds and private equity groups will be able to solicit directly to potential investors of all financial standings.

So what does this mean for the consumer looking to invest? Cynthia Hetherington (pictured), president of the Hetherington Group, a private firm specialising in intelligence, investigations and fraud, says: "This is unchartered territory and the key venue for solicitations is expected to be social networks.  Consumers need to be mindful of the potential for investment fraud and that irresponsible and under-regulated opportunists may directly solicit the ‘little guy’ with pipe dreams of large returns on his few thousand dollars."

One avenue to this potentially fraudulent solicitation is called "Crowd Funding" (aka Crowd Financing), which originally began as an online way to build capital for special projects, such as raising money for a charity or artistic projects, that people in will put their money into even in small amounts. Now, it will also refer to the funding of a company by selling small amounts of equity to many investors.

The Hetherington Group offers the following tips to help protect investors from being caught in any potential fraud net:

1. Although they can advertise to consumers, bear in mind that hedge funds are required to accept only serious "accredited investors," having at least USD1m in liquid assets, or a USD200,000 annual income for an individual or USD300,000 for a couple. If you don't meet the criteria you shouldn't be participating in a hedge fund.

2.  When in doubt check the broker's background.  Each broker must be registered with the Securities Exchange Commission in its state and with the Financial Industry Regulatory Authority. Visit North American Securities Administrators Association at www.nasaa.org [1], select the NASAA Fraud Center under Investor Education and click on "How to Check Out Your Broker or Investment Adviser”.

3. Beware of offerings that seek investments immediately.  Investors will be taking on a very high risk, even for legitimate solicitations since about 50 per cent of all small businesses fail within the first five years.

4. Issuers using funding portals to raise money may be inexperienced. Their track records maybe unproven, unsubstantiated or outright fraudulent. Request full and complete disclosure beyond what is available on a website.

5. 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 organisation (SRO), and comply with other rules the SEC may issue.

6. Social media sites are the connection point of the day. However, even friends and families are not aware of the vulnerabilities and deceit that can occur. They may innocently forward a link or application to try via this media and you will inadvertently infect your computer 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 and skip all the extras that compromise your security.

"Nothing beats good old common sense when it comes to your money," says Hetherington.  "Even though there were thousands of victims Bernard Madoff took advantage of, there were even more who considered his offer ‘too good to be true’ and avoided the Ponzi that destroyed so many. By keeping these points in mind and consumers should remain at ease with their investment choices."