How To Avoid Becoming A Victim Of Investment Scams

5 min read By eCompareMo on February 28, 2019

Earlier this month, the Securities and Exchange Commission (SEC) issued a cease-and-desist notice to Kapa-Community Ministry International (KAPA), a religious group that solicits investments from its members with a promise of guaranteed returns.

In a press statement released on February 25, the commission revealed that the said company has been selling investment contracts to unsuspecting members looking for a way to grow their finances.

No license to solicit for investments

Although KAPA is registered with the SEC as an “independent religious organization” under section 116 of the Corporation Code of the Philippines, it doesn’t have the license required to be able to solicit any form of investment from the public.

According to the rules of the SEC, a secondary license is required by the agency to be able to undertake actions such as buying and selling securities, lending money to the public, underwriting securities, acting as clearing houses, and others. KAPA hasn’t secured a permit to do any of those activities.

KAPA works in two ways: first, it recruits people into becoming members of its religious ministry with a membership fee of P100. Second, it offers its members an investment vehicle with the allure of huge profits of up to 30 percent monthly. However, based on the investigation by the SEC, it uses the word “donation” instead of investments.

In addition to the cease-and-desist order, the agency also ordered KAPA and its associates to take down its video presentations on the internet and barred the company from liquidating its assets “for the benefit of the investors, respondents, or any of their representatives.”

A few days after the SEC order, KAPA released a memo through the Facebook pages of its different chapters that people who will pull out their “donations” will be prohibited in its ministry, a “mandatory order” from its founder Joel Apolinario. He is also one of the incorporators of the group listed on its SEC registration. Withdrawing your investment from KAPA is tantamount to “disloyalty and betrayal to the o rganization/ministry.”

(Read: SEC Releases Guidelines For Initial Coin Offerings And Legal Crypto Trading)

Ponzi scheme versus pyramid scheme

The SEC believes that KAPA’s solicitation of investments is akin to a Ponzi scheme. In a nutshell, a Ponzi scheme is a fraudulent investment vehicle where a nonexistent financial scheme is being promised by a certain individual or group.

By the time people start to demand their payout, they will be paid through the contributions of the newer members.

To sustain the act, they transfer the funds they collected from newer investors to older ones and do the same once there is a new batch of people buying in the whole program. Eventually, the scheme will collapse due to the lack of fresh funds from new members.

A Ponzi scheme has two striking characteristics. First, it lures people with the promise of huge guaranteed returns. Second, the company doesn’t clearly communicate to the people how their scheme makes money, allaying any doubts by leading them back to the first one.

(Read: The 4 Most Common Car Insurance Scams In The Philippines—And How To Avoid Them)

More than a decade ago, one of the biggest Ponzi schemes in the Philippines was dismantled. According to reports, FrancSwiss Investment was able to swindle around P1 billion from numerous investors. Celebrities, athletes, and broadcast journalists were among those who fell prey to this scam.

Although similar in terms of the need for more members, a pyramid scheme is different from a ponzi scheme. It is another form of investment that follows the same need for new members to survive. However, the latter requires more involvement from participants because they need to recruit more members to earn money.

Another prominent difference between the two is the type of investment people make in such schemes. In a Ponzi scheme, people believe that they’re investing in securities. Meanwhile, participants in a pyramid scheme know they will earn money from both the products they sell and the recruits they enlist.

How can you protect yourself from bad investments?

Every now and then, the media will catch a whiff of an SEC advisory regarding a certain business’ dubious activities. However, it might be too late for some people who already fell for bad investments hook, line, and sinker.

If you don’t want to quickly part ways with your hard-earned money, you should watch out for the following signs that you’re dealing with a fraudulent company:

• The biggest red flag of them all is when they promise quick, easy, and risk-free investments.
• Scammers tend to pressure you into investing as quick as possible; sometimes, they want you to shell out money in that moment.
• They have inside information such as hot tips and rumors that will give their investors and edge.
• They bombard you with testimonials from other investors and tempt you with riches that can get you exotic cars, houses, and other shiny things.
• They manipulate you into feeling guilt by comparing your day job with slavery or some form of imprisonment.

(Read: Scam Alert: Beware Of Phishing Attempts From ‘Official’ Email Addresses And Phone Numbers)

When someone offers you to invest in their company, one of the most basic ways they can trick you about their legitimacy is by saying they’re an “SEC-registered company.” However, any entity can register as a corporation through the agency and it only gives them the rights and duties to exist.

According to Section 12 of the Securities Regulation Code, the SEC issues a separate license for companies that want to sell any form of security to the public. This is the main reason a lot of companies have been slapped with a cease-and-desist order: they do not have the authority from the agency to ask people for investments.

To check if a company is authorized by the SEC, you can go to the agency’s website and use the search function. If the first result is an SEC disclaimer or cease-and-desist order, then we have bad news for you.

In the old days, a company without a website was a telltale sign that they are running a scheme. However, building a website has become much easier nowadays and anyone can just beef up their online presence and appear legitimate. In this day and age where everything is online, ask the soliciting party about their office details such as complete address and landline number.

If you feel like you’re being lured in an investment scam, contact the SEC’s Enforcement and Investor Protection Department at 818-5704. You can also reach the SEC through their i-Message Mo portal by going to official SEC website and looking for the “message us” portion on the header.

Investing isn’t about guaranteed returns. As with anything, any form of investment has a chance of going down. Legitimate investment vehicles allow you to manage your risks properly so you can enjoy the benefits later on.

If an investment is too good to be true, it most certainly is. And as always, only invest the money you can afford to lose.

Other sources: Chan Robles, SEC