Fraud and digital assets pose risks for investors

FRANKFORT, Ky. — The Department of Financial Institutions today reminded Kentuckians to beware of investment fraud in 2022 as scams continue to thrive. The department also revealed that investments related to cryptocurrencies and digital assets can pose significant risks to investors.

“As Kentucky’s economy continues to strengthen and grow at historic rates, our Commonwealth and our citizens will see many promising financial opportunities,” Governor Andy Beshear said. “It’s important for Kentuckians to carefully select investment options and investment professionals so they save and invest in their future and avoid scam artists.”

“Investors should be particularly alert to popular or trending investment opportunities they discover online that involve cryptocurrencies or digital assets, precious metals and promissory notes,” said Marni R. Gibson, chief securities officer of DFI. “Many of these investments are private offerings, which do not have the same investor protection requirements as those sold in public markets.”

“Nearly a quarter of the complaints we received last year involved allegations of fraud,” Gibson noted. “While complaints in the Commonwealth covered a wide variety of products, the top five categories were IRA/CD accounts; stocks and bonds; virtual currency; promissory notes; and investment contracts.

The number of consumer complaints to DFI’s Securities Division increased by one-third last year, from 42 in 2020 to 56 in 2021. Twenty-nine percent of complaints to DFI in 2021 were about cryptocurrencies and digital assets. Cryptocurrencies and other digital assets pose significant risks because they are highly volatile and largely unregulated.

Kentucky’s primary investment risks closely match the primary risks identified by the North American Securities Administrators Association, of which Kentucky is a member. NASAA recently surveyed state and provincial securities regulators in the United States, Canada and Mexico. The survey revealed the following key threats to investors in 2022:

  1. Investments related to cryptocurrencies and digital assets.
  2. Fraudulent offers related to promissory notes.
  3. Financial scams offered through social media and internet investment offers.
  4. Financial schemes linked to self-directed individual retirement accounts.

Perhaps the most important thing investors can do to protect themselves is to ensure that the investment and the people offering it are properly registered with DFI or the Securities and Exchange Commission. Kentuckians can visit https://kfi.ky.gov or contact DFI’s Securities Division for assistance with this process.

“Working with a properly registered investment professional provides investors with certain legal protections,” Gibson said. “In Kentucky, nearly 40% of complaints received by the Securities Division in 2021 were about securities, companies, or individuals that were not properly registered with the department.”

In addition, DFI offers the following tips to help investors identify and avoid fraud and scams:

  1. Beware of spoofed websites and fake social media accounts. Carefully review the content, date the site or account was created, quality of engagement, and domain names.
  2. Beware of fake customer reviews. Scammers often use positive but fake testimonials supposedly written by satisfied customers.
  3. If it sounds too good to be true, it probably is. Promises of low-risk or no-risk investments with high returns are often a red flag for fraud. All investments involve some degree of risk.

“Individuals offering investments are required to honestly disclose all material facts and they must disclose risks,” Gibson said. “Investors should pay particular attention to high profits and payouts with minimal risk, as these could provide clues to the legitimacy of an investment opportunity.”

Before making any financial decisions, ask questions, do your homework, and contact the Securities Division at (502) 573-3390 or by visiting http://kfi.ky.gov for more information.

For more information on the top threats to NASAA investors, visit https://www.nasaa.org/investor-education/fraud-center/top-investor-threats/.

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