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FAQs LINKS
QUESTIONS AND ANSWERS ABOUT SECURITIES AND INVESTING
Q: What is a security?
Q: Do all securities have to be registered?
Q: What is the difference between saving and investing?
Q: How do I verify before I buy securities?
Q: What are the “red flags” of a fraudulent investment?
Q: I received an unsolicited call about an investment opportunity. What should I do?
Q: How do I know if a “cold call” is legitimate or not?
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Q: What is a “security”?
A: Securities are investments. They include stocks, bonds, debentures, various commodities, mutual funds, certificates of deposit, and numerous other means of entrusting your money to someone else with the expectation of receiving a profit. Some other example of securities may include promissory notes, interest in mining ventures, real property investment contracts, and other "investment contracts." Just because a seller doesn't call the investment a "security" doesn't mean that it is NOT a security. Components by which you can identify a security include:
An investment of money (or valuable property) in a common enterprise,
With an expectation that you will receive a profit,
Where you expect the profit to come primarily from the efforts of someone other than yourself.
The issue of what constitutes a security in areas other than traditional investment products continues to confront the Division. Sellers seeking to avoid disclosure requirements under the Act continue to be creative in putting together programs which, they argue, do not fall within the definition of a security. The most common tactic is to use "third parties" to provide managerial efforts for investors. How the Division views transactions, however, is in the context of their economic substance, rather than form.
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Q: Do all securities have to be registered?
A: All securities sold within or from Arizona must either be registered or exempt from registration under Arizona law. In some cases, but not all, even sellers of exempt securities must make some filing with the Securities Division. If you have a question whether or not a security is registered or questions that do not require filing with the Securities Division, call the Duty Officer at (602) 542-4242. Remember, however, that the Securities Division cannot confirm whether an exemption actually applies to a particular security.
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Q: What is the difference between saving and investing?
A: Saving is retaining money in the safest places, or products, in which you do not risk your "principal"— the money you deposit. These funds may earn "interest" (the money earned above the principal amount) and provide "liquidity” (the ability to access your money at any time). At many banks, your deposits may be insured by the Federal Deposit Insurance Corporation (FDIC). At credit unions, your deposits may be insured by the National Credit Union Association (NCUA). Wise investors put enough money in a savings product to cover an emergency, like sudden unemployment. Some people make sure they have up to six months income in savings so they know it will absolutely be there for them if they need it.
Investing involves a greater chance of losing your money than when you save. Unlike insured deposits, the money you invest in securities, mutual funds, and other investments is not federally insured. You could lose your “principal”—the amount you have invested. But you also have the opportunity to earn money.
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Q: How do I verify before I buy securities?
A: Although doing your best to verify can’t guarantee you’ll never be a victim, it can help you eliminate investments that may not be suitable for you or that may be fraudulent. Before handing over your money, always investigate investment advisers (sometimes called investment or financial planners), securities salespeople (sometimes called brokers, stockbrokers, or agents), the firms for which they work (investment advisers, broker-dealers, or brokerage firms), and the investment they want you to buy. Here are some tips:
Get it in writing. Whatever an adviser or a securities salesperson tells you about himself or herself, about the investment he or she is offering to you, or about the company or people in which you would be investing, get what you are told in writing. Anyone offering you an investment opportunity should give you an offering memorandum—a complete description of the investment and the people and risks involved with the investment.
Read the offering memorandum. If you do not understand it, get help from an accountant, lawyer, or another independent third party who does understand how to read an offering memorandum.
Ask questions about your adviser or salesperson.
Talk to your adviser or salesperson and insist that he or she answers your questions to your satisfaction. Write down the answers you are given, the name of who gives you the answers, and the date. Ask:
- What commission or fee will you earn if I buy the investment?
- Who or what entity will be paying you?
- Will you be receiving any benefit other than your commission or fee if I buy the investment?
- Are you related to or involved with the investment in any way other than recommending that I buy it?
- Are you registered or licensed and, if so, with whom? If you are not registered or licensed with a regulatory agency, why not?
- Have you ever been sued, disciplined, or had any complaints filed relating to your work as a salesperson or adviser?
Independently research the background of your adviser or salesperson.
If you are dealing with an investment adviser, check the IAPD (Investment Adviser Public Disclosure web site: www.adviserinfo.sec.gov) to see if the investment adviser is licensed in Arizona, how long the adviser has been licensed, and whether the adviser has any disciplinary history. If you do not have access to the IAPD, contact the Securities Division.
Also, check out the investment adviser representative (the individual dealing with you, who works for the investment adviser) by contacting the Securities Division.
If you are dealing with a securities salesperson, check out the individual and the dealer for whom the salesperson works on the Web CRD (Central Registration Depository) to see if the salesperson and dealer are registered in Arizona, for how long, and whether they have any disciplinary history. Click on BrokerCheck at the left hand menu of this site that links to www.finra.org. If you do not have access to the Web CRD, contact the Securities Division’s Duty Officer at 602-542-4242 or toll free within Arizona, 1-866-VERIFY-9 (1-866-837-4399).
Ask questions about the investment.
Ask your salesperson, your adviser, and the officers or directors of the company in which you may make an investment all of the questions you have about the investment until you understand it and are comfortable. Write down the answers you are given, the name of the person who gives you the answers, and the date.
Ask: Is the investment registered with the Securities and Exchange Commission or the Arizona Securities Division? If not, why not? If the investment is exempt from registration, what is the nature of the exemption? Is a notice regarding this exempt offering on file with the SEC or the Securities Division? If not, why not?
NOTE: The fact that a particular investment is registered, or exempt from registration, is not a guarantee as to how that investment will perform, or that it is an appropriate investment for you. If you need assistance understanding an investment and when it is suitable to invest in that type of investment, seek assistance from an accountant, attorney, or independent adviser.
Understand the fundamental nature of the investment. Understand the tax implications of the nature of the investment. Understand your rights as a creditor or an owner if the entity in which you are investing goes bankrupt.
Is it a debt offering? If you invest in a debt offering (notes, bonds, debentures), you will become a creditor. If the offered security is a debt obligation, who will repay your investment to you? Will you get interest; how much? Is your investment, the debt obligation, secured or guaranteed? If so, by what or whom?
Is it an equity (stock) offering? If you obtain an equity interest in an entity, you become an owner. Will you own shares of stock in a corporation? Will you own a partnership interest or a limited liability company membership interest? Will you have any control over how the entity is run? Will you receive dividends?
Is the investment “liquid”? Can you sell the investment if and when you want to? Is there a market—are other buyers interested in the investment? Will you be able to get your entire investment back? Do you have to hold the investment for a specific period of time? Will you have to pay penalties if you sell the investment earlier?
NOTE: Not all securities offerings contain a “buy-back” feature and if you need to get your money back, you will likely have to attempt to sell the investment on the “secondary market” if one exists. If you have to sell your investment in a secondary market, you may have to sell for a substantial discount from the original amount of your investment.
What type of business are you investing in? Is it an established business with an operating history? If so, what is that history? If not, does the proposed business make sense? Is it likely to be successful?
Who is responsible for operating the business in which you are investing? Do those persons have the necessary skill, experience, and training to operate the business?
What risks are you taking by making the investment? What factors may jeopardize the success of the business undertaking?
What factors may jeopardize your ability to recover your investment and make a return on that investment?
NOTE: Once you thoroughly understand the types of business risks and market risks involved with the investment, you need to assess your financial position and risk tolerance. Can you afford or are you willing to take those risks?
Independently research the investment.
Check the public records of the superior court to see if any of the people or entities involved have been or are involved in a lawsuit.
www.superiorcourt.maricopa.gov
602-506-3360
Check the public records of the bankruptcy court to see if any of the people or entities involved have filed bankruptcy.
602-640-5800 (Phoenix)
928-783-2288 (Yuma)
520-620-7500 (Tucson)
Call the Better Business Bureau to see if the entities involved are members and if any complaints have been filed.
www.phoenix.bbb.org
602-264-1721
1-877-291-6222
Check Corporation Starpas or contact the Corporations Division of the Arizona Corporation Commission to see if the corporations involved have filed annual reports, which list financial, officer, and director information. Certain Arizona corporations are required by statute to file annual reports with the Arizona Corporation Commission.
www.azcc.gov
602-542-3026 (Phoenix)
1-800-345-5819
520-628-6560 (Tucson)
Call the Office of the Attorney General (602-542-5763) to see if it has any information about the people or entities involved.
Contact relevant departments to see if people are appropriately licensed and if they have disciplinary histories.
Department of Real Estate – 602-468-1414 (x100)
Department of Insurance – 602-364-3100
Securities Division – 602-542-4242 or 1-866-VERIFY-9 (1-866-837-4399).
For a directory of telephone numbers of regulatory entities, view the document, When Investing, Verify Before You Buy: A Directory of Important Telephone Numbers."
Review materials that discuss that type of investment. Besides the www.azinvestor.gov web site, you can obtain many such materials from the following organizations:
Securities and Exchange Commission (SEC)
Telephone: 202-272-2800
Toll free: 800-732-0330
www.sec.gov
Financial Industry Regulatory Authority (FINRA)
Telephone: 202-728-8000
Toll-free: 800-289-9999
www.finra.org
North American Securities Administrators Association (NASAA)
Telephone: 202-737-0900
www.nasaa.org
Alliance for Investor Education
www.investoreducation.org
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Q: What are the “red” flags of a fraudulent investment?
A: Here’s the TOP TEN list:
- “Inside information” that only a few people are being told.
- “Secret methods” or “formulas,” for example, for extracting gold or finding a cure for cancer.
- Repeated telephone calls to break down resistance.
- Limited time period (often days) in which to decide.
- Statements that investment is “risk-free” or guaranteed.
- Requests for your credit card number.
- Offer to pick up your check by courier.
- Requests for up-front money before you have access to information.
- Refusal to send written information.
- An opportunity that sounds too good to be true.
If someone approaches you about an investment and these “red flags” are present, ask for the caller's contact information and immediately notify the Securities Division at 602-542-4242 or toll free, 1-866-VERIFY-9 (1-866-837-4399).
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Q: I received an unsolicited call about an investment opportunity. What should I do?
A: These unsolicited calls are called “cold calls.” A “cold call” is when someone you don’t know calls you on the telephone to try to sell you an investment product. Cold callers who are actually from the securities industry are required to follow certain rules. They must:
Call only between 8:00 a.m. and 9:00 p.m.
These restrictions do not apply if you are already a customer of the firm or you have given them permission to call you at other times. Cold callers may call you at work at any time.
Say who’s calling and why…Cold callers must promptly tell you:
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Their name
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Their firm’s name, address, and telephone number, and
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That the purpose of the call is to sell you an investment
Put you on their “Do Not Call” list if you ask…
Every securities firm has a “do not call” list. If you want to stop sales calls from the firm, tell the caller to put your name and telephone number on the firm’s “do not call” list. If anyone from that firm calls you again, get the caller’s name and telephone number. Note the date and time of the call, and complain to the firm’s compliance officer, the Securities & Exchange Commission, the Federal Trade Commission, and the Securities Division.
Treat you with respect…
Cold callers cannot threaten, intimidate, or use obscene or profane language. They cannot call you repeatedly to annoy, abuse, or harass you.
Get your written approval before taking money directly from your bank account…
If you do decide to buy from a cold caller, do not give your checking or savings account numbers to the salesperson over the telephone. Salespeople must get your written permission—such as your signature on a check or an authorization form—before they can take money from your accounts.
Tell you the truth…
People selling securities must tell you the truth. Salespeople who lie to you about any important part of an investment opportunity violate federal and state securities laws.
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Q: How do I know if a “cold call” is legitimate or not?
A: Honest salespeople use cold calling to find clients for the long term. They ask questions to understand your financial situation and investment goals before they recommend that you buy anything. While you may find their cold calls annoying, honest salespeople who follow the cold calling rules are acting within their rights.
Dishonest salespeople use cold calling to find “quick hits.” Some set up “boiler rooms” where high pressure salespeople use banks of telephones to call as many potential investors as possible. These strangers may charm or hound you to buy stocks in small unknown companies that are highly risky, or sometimes part of a scam.
Watch for these signs of trouble:
High pressure sales tactics…
Aggressive cold callers speak from scripts that include retorts for every objection. As long as you stay on the line, they will keep trying to sell. And they will not let you get in a word edgewise. For every objection you have, they return with an explanation. Remember, you have the right to hang up—you don’t have to listen!
Be wary of promoters who pressure you to buy before you have a chance to think about and investigate the “opportunity.”
Watch out for promoters who tell you about a “once-in-a-lifetime” opportunity, especially if the caller bases the recommendation on “inside” or “confidential” information. That “once-in-a-lifetime” opportunity could cost you your life savings!
Don’t fall for salespeople who promise you spectacular profits or “guaranteed” returns. If the deal sounds too good to be true—it probably is!
Don’t deal with salespeople who refuse to send you written information about the investment. Remember, the law requires written disclosure!
The “three call” technique…
Some cold callers wait before they turn up the heat!
In their first call—the “warm up”—they’ll try to build your trust by describing their firm’s past successes and the high quality of its research. The caller might ask permission to call again if an “exciting” deal comes along, but will not pressure you to buy.
In their second call—the “set-up”—they will whet your appetite, telling you about a “fabulous deal” they “think” they can get you into.
In their third call—the “close”—they will urge you to “buy now” or miss out.
Always remember to check on any investment opportunity before you act on it—Verify Before You Buy!!
Bait and switch…
Some dishonest salespeople lure new customers by encouraging them to purchase well-known, widely traded “blue chip” stocks. After you take the bait, they may pressure you to invest in small, unknown companies with little or no earnings. These stocks tend to be very risky and thinly traded, leaving investors with more losses than profits.
NOTE: Just because a salesperson recommends companies you don’t know doesn’t necessarily mean he or she is dishonest. You should investigate carefully, however, before you accept an investment in a company you don’t know.
Paying too much…
Although they may not say so, dishonest salespeople who push you to invest in a small, unknown company often work for firms that own a large amount of that company’s stock. The firm may have been involved in the company’s initial public offering (“IPO”), or the firm may “make a market” in the stock for its own account (sometimes called a “house stock”).
If only one firm or a small group of firms makes a market in the stock, the price can be manipulated and may not reflect the true value of the company.
Dishonest salepeople often pump up the prices of their house stock until they get rid of their own holdings at high prices. But when they stop promoting the stock, the price falls, and investors lose money.
If you aren’t careful, you may pay too much for “house stocks.” Some dishonest salespeople overcharge their customers by adding an undisclosed “mark-up” to the price the firm paid for the stock. Although it is illegal to charge excessive mark-ups, some dishonest salespeople mark up the price of the stock they sell by 100% or more.
Finding it hard to sell…
Many investors find that once they buy a “house stock,” they cannot get what they paid for it, even if they decide to sell right away. Or they find that their salesperson simply will not sell the stock at all. Some firms follow “no net sales” policies where salespeople cannot execute orders to sell “house stocks” unless they find another customer to buy an equal number of shares.
Other firms discourage salespeople from selling “house stocks” for their customers by offering low—or no—commissions on those sales.
Dishonest salespeople often refuse to take or return phone calls from customers who want to sell. These brokers will use high-pressure tactics to persuade you to keep the stock. Or they will simply refuse to sell it.
But…What can I do?
Report abusive cold callers…
When cold callers use harassing, abusive sales tactics and lie to you about investment opportunities, they violate the cold calling rules and break federal and state securities laws. Don’t let them off the hook! To complain about a cold caller, write down:
- the name of the caller,
- the name of the firm,
- the date and time of the call or calls,
- what the caller said to you, and
- what you said to the caller.
You can send your complaints either to a federal agency (the SEC or the Federal Trade Commission), or a state securities regulator:
SECURITES AND EXCHANGE COMMISSION
OFFICE OF INVESTOR EDUCATION & ASSISTANCE
MS 11-2
450 FIFTH ST, NW
WASHINGTON DC 20549
Tel: 202-942-7040
Fax: 202-942-9634
E-mail: help@sec.gov
FEDERAL TRADE COMMISSION
CRC-240
600 PENNSYLVANIA AVENUE, N.W.
WASHINGTON DC 20580
Tel: 202-326-2222
E-form: Complaint Form
SECURITIES DIVISION
ARIZONA CORPORATION COMMISSION
1300 W WASHINGTON 3rd FLR
PHOENIX AZ 85007-2996
Tel: 602-542-4242
Toll-free: 1-866-VERIFY-9 (within Arizona)
Fax: 602-594-7470
E-mail: securitiesdiv@azinvestor.gov
Tell bad cold callers not to call again…
Some salespeople just don’t get it. No matter how many times you’ve told them “no thanks,” they just keep calling. If cold callers annoy you, stop them even before they start their sales pitch. Tell the caller to put you on the firm’s “Do Not Call” list. If anyone from the firm calls again, complain to the firm’s compliance officer, the SEC, the FTC, and the Securities Division.
Don’t warm up to bad cold callers…
Cold callers often try to “warm up” potential investors with flattery or friendship. They may try to put you off guard by chatting about your hometown or the local sports team. Or they might suggest they’ve spoken with you before. Don’t fall for these tactics!
And don’t feel compelled to be polite or stay on the line. You don’t have to listen if you don’t want to, and you don’t have to tell cold callers about yourself or your finances. Say “no thanks” or “I’m not interested” and hang up. Don’t wait for the cold caller to end the call. YOU are the one in control and can hang up any time. If you get a fraudulent sales pitch, be sure to take notes and report the caller.
What if I want to invest as a result of a cold call?
Never buy an investment based only on a telephone sales pitch. A wise investor will always:
- slow down and ask questions,
- get written information about the investment, and
- verify the background of the company and the salesperson.
Memories can fade, so take notes in order to have an accurate record of what the salesperson told you, just in case you have a dispute later. Before making a final decision, take the time to verify. Follow these steps:
1. Call the Duty Officer (602-542-4242) and ask…
- Is the investment registered?
- Is the salesperson registered or licensed to do business in Arizona?
- Has the Securities Division taken any action against the salesperson or the company? Is there a disciplinary history?
- Has the Securities Division taken any action in connection with the stock, the company, or the company’s managers?
The Duty Officer will pull the information from a national computer system called the Central Registration Depository (CRD). You can also obtain partial CRD disciplinary history about a securities salesperson and/or a firm by contacting the Financial Industry Regulatory Authority at (800) 289-9999 or by visiting the web site at www.finra.org.
2. Call your registered securities salesperson and ask these questions about the investment and company…
Registration Status:
- Is the investment registered with the SEC and the Arizona Securities Division?
About the investment:
- Where does the stock/investment trade?
- How can I get information about the trading prices?
- How easily can I sell?
- What price would I get if I decide to sell immediately?
About investment objectives and risks:
- How does this match my investment objectives?
- What is the risk that I could lose the money I invest?
About the company:
- How long has the company been in business?
- Is the company making money?
- If it is making money, how?
- What is it product(s) or service(s)?
- Have the people who are managing this company ever made money for investors in the past?
- Will you send me the latest reports that have been filed on the company?
- How can I get more information about this investment?
About the costs:
- What will it cost me to buy this investment?
- What will it cost me to hold this investment?
- What will it cost me to sell this investment?
3. Do your own research…and get as much written information about the investment as you can. Ask for:
- a prospectus
- annual report
- offering circular
- financial statements
Your local library may have resources that provide additional information about the company, such as lawsuits, liens, or recent credit reports. Refer to databases, Standard & Poor’s (http://www.standardandpoors.com), and the SEC web site (http://www.sec.gov) for ratings, financial reports, and history.
Compare the written information with what you have been told and given.
Watch out if you are told that no written information about the company is available. If that happens, call the Securities Division immediately!
Be careful of written information or information on the Internet as well. Glossy brochures and pamphlets, or beautiful information on a web site, may be false. Use your own data to verify!
Get a second opinion…
Talk to a trusted financial adviser, attorney, or accountant, someone not earning a commission on the investment. Consider calling another firm for a second opinion.
Monitor your investment…
After you have invested, monitor your investment closely. Make sure your salesperson sends you account statements and written confirmation of all trades and activity. Read these documents carefully to make sure they are correct. Be alert for any transactions you did not authorize.
Complain promptly if you find something wrong…
Contact your salesperson’s supervisor or the firm’s compliance officer. If that does not resolve your problem, complain to the SEC or the Securities Division. Complaints from investors often alert regulators to wrongdoing in the industry and are the first step in stopping a bad salesperson or firm. By complaining early, you may have a better chance of getting your money back and protecting your legal rights.
Remember, that neither the SEC nor the Securities Division can protect your individual legal rights or file suit on your behalf. The statutes of limitation in Arizona for securities violations are short, so you also may want to contact an attorney to check on your rights.
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