You have a great idea that you want to turn into a business or an existing company that could be so profitable with just a little help. Securing investment capital is a necessary step for many entrepreneurs and existing businesses. However, you need to convince businesses and individuals that your idea or business is a sound investment with an opportunity with profit.
Most investors will want to look carefully at the businesses or ideas in which they intend to invest their money. As the person with the company or idea, you may feel the need to convince potential investors of the value your company or idea represents.
There’s nothing wrong with enthusiasm and persuasive speech, but if you cross the line into outright lying, you could find yourself accused of investment fraud. What are two of the more common situations in which people wind up committing investment fraud while trying to operate a business?
They use new money to cover old losses
When investment returns actually come from new investors, everyone stands to lose a lot of money, but that can be what happens when an investment company or fund starts to struggle. A Ponzi scheme involves a fund manager or business owner taking money from new investors to pay out as returns to prior investors.
Instead of actually generating capital and returns on investment money, they inject new money from new clients into an existing and struggling system. Although people may start this practice with good intentions, the results may be that all of their investors lose a lot of money.
They lie about the businesses finances or prospects
When you provide information to investors to convince them to put money into your business, you need to give them accurate information. If you lie to them by misrepresenting the company’s liabilities and assets or grossly exaggerating the potential for profit and returns on the investment, those investors could eventually hold you accountable for those lights.
In some cases, investors can take you to civil court because of their losses. Other times, their claims about your conduct could lead to a federal investigation and investment fraud charges. Recognizing potentially risky business practices can help you avoid white-collar criminal charges.