State Agency Identifies Top Emerging Threats to Investors for 2015

HARRISBURG, Pa. – The Department of Banking and Securities on Friday identified the top emerging threats facing investors in 2015.

The following list of top threats facing investors was compiled by the North American Securities Administrators Association (NASAA), of which the Department of Banking and Securities is a member:

– Binary Options
– Marijuana Industry Investments
– Stream-of-Income Investments
– Virtual Currencies and Cybersecurity Risks

“We are living in an age where traditional financial and investing relationships are being transformed rapidly and sometimes in confusing fashion by technology and innovation,” said Glenn E. Moyer, Secretary of Banking and Securities. “It is especially important that investors fully understand where they are putting their money, and with whom they are investing it.”

The Department of Banking and Securities can provide detailed background information about those who are registered to sell securities or provide investment advice in Pennsylvania, and about the products being offered.

“We urge investors to heed the old adage: if it sounds too good to be true, it is probably neither good nor true,” Moyer said.

For more information, visit www.dobs.state.pa.us or call 1-800-PA-BANKS (800-722-2657).

Definitions of Top Emerging Investor Threats

Binary Options: Binary options are securities in the form of options contracts that have a payout that depends on whether the underlying asset – for example, a company’s stock or a stock index – increases or decreases in value. In such an all-or-nothing payout structure, investors betting on a stock price increase face two possible outcomes when the contract expires: they either receive a pre-determined amount of money if the value of the asset increased over the fixed period, or no money at all if it decreased. Unlike a traditional option, a binary option will pay a fixed sum at expiration regardless of the magnitude of the difference between the settlement value and the option’s exercise price. A call binary index option would pay out if the settlement value of the underlying index were at or above the option’s exercise price at expiration, and a put binary index option would pay out if the underlying index were below the option’s exercise price at expiration. Binary option risks include: illegal distributions — trading of binary options without complying with applicable registration and distribution requirements; potential for fraud — fraudulent promotion schemes (with misleading average returns on investment); identity theft (collecting customer information such as credit card and driver’s license data for unspecified uses); refusals to return, or pay out, investor funds; potential for abusive trading — manipulation of the binary options trading software to generate losing trades. Particular investor risks are that the option is an all-or-nothing payout structure and investors can easily lose their entire investment. In addition, much of the binary options market operates through Internet-based trading platforms that are not necessarily complying with applicable regulatory requirements

Marijuana Industry Investments: In the United States, medical marijuana is legal in 23 states and the District of Columbia, and recreational use is legal in four states and the District of Columbia. The legalization of this once prohibited substance is generating headlines, which, in turn, has grabbed the attention of investors looking to capitalize on the high potential of this new legal market to invest in companies that provide products and services to the marijuana industry such as vaporizers, hydroponic supplies, lighting systems, and security systems. Many of these companies are micro-cap companies selling low-priced securities that typically are highly speculative and carry a high degree of risk for investors. Fraudsters can lure investors with aggressive, optimistic, and potentially false or misleading information designed to create unwarranted demand for shares of a small, thinly traded company with little or no history of financial success. Once share prices and volumes peak, scammers behind the ploy sell their shares at a profit, leaving investors with worthless stock. Investors should think carefully and do their due diligence before jumping into marijuana-related investments.

Stream-of-Income Investments: Investors looking for monthly returns are being enticed to invest by companies that introduce investors to individuals selling a stream of income, such as pension payments or government disability payments. These investments can carry significant risks as laws may prohibit the assignment of the stream of income/benefits. The seller typically maintains the legal right to redirect the payment, and if the seller does redirect the payment, the investor may be left with an unenforceable contract right. In addition, the benefits are contingent on the life of the seller, and even life insurance policies on the seller’s life may be cancelled and do not protect an investor if a seller simply redirects the income stream. Sales of these investments can adversely affect veterans and disabled persons, who can assign their benefits when they experience financially stressful times, selling much needed future benefit payments at a significant reduction. Investors should consider obtaining independent legal advice before investing in the purchase of another person’s income stream and also check with the Department of Banking and Securities to confirm that the investment and those selling it are exempt from registration or are properly registered.

Virtual Currency and Cybersecurity Risks: Virtual currencies are emerging as trendy way to pay for goods and services. Bitcoin, perhaps the most popular virtual currency, was priced at around $10 per unit in early 2013 but peaked at around $1,200 per unit later that year. The rapid price increase sparked considerable public interest and media attention, creating a fresh market for securities offerings tied to virtual currencies. Even legitimate securities offerings tied to virtual currencies may present considerable risks to the investing public, including risks associated with volatility and demand for the units, the anonymity associated with the use of certain virtual currencies, and the threats posed by hackers using malicious software to compromise network security systems. These risks were highlighted earlier this year when Mt. Gox, once the world’s largest Bitcoin exchange, filed for bankruptcy amid reports that hackers may have stolen around 850,000 Bitcoins worth as much as $500 million.


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