3 Red Flags When Investing

One of the feared consequences of the JOBS Act was the potential for it to create additional opportunities for fraudulent investments. This is somewhat being realized in the number of so called “shell corporations” and “blind pools” or “blank check companies,” which are entities that have no operating history, and essentially raise money for the managers to invest in whatever they see fit. (The shell being the people with the funds yet no real infrastructure.) The shares in these companies often do not make it to a stock exchange, and brokers who sell the shares earn heft commissions.

Investment Red Flags

While this blog is not designed to give advice on investing, and you are probably best advised to consult with your trusted financial professional, here are some red flags to get a better sense of the transparency of the investment you are considering:

1. Look for “emerging growth company” in the financial statements. This will indicate the relative age, and perhaps stability, of the company.
2. Determine whether the company has chosen to abide by the less stringent accounting requirements, such as indicated by “changes in accounting policies,” as a footnote in its annual report.
3. If the company has chosen to stop filing reports with the SEC completely, you will have to evaluate whether you trust the company’s management enough to believe you won’t lose your money with this loss of accountability.

Again, these 3 red flags are simply meant to serve as potential guideposts for risky investments. It is plausible that an emerging growth company may present all of these factors and yet remain a legitimate normally operating business. For additional information, see