Fraud & Its Modern Forms

⚠️ Scope: fraud applies to everything

🔑 From the chapter’s “Enforcing anti-fraud laws” sidenote:

An exemption means many laws, rules, and orders may not apply. However, anti-fraud statutes apply in all circumstances, including situations involving exempt persons and/or securities. Nothing escapes the anti-fraud provisions of the USA, and the state administrator can pursue action against a person or issuer even if they’re normally not subject to securities laws.

Warning signs of fraud

NASAA has identified several “red flags” that often show up in fraudulent schemes. In a publication to investors, NASAA lists the following warning signs of fraud. Each is a discrete red flag:

• 📌 If you see similar language or situations in a test question, the question is likely describing a fraudulent scenario. If it doesn’t pass the “smell test,” it’s likely fraud.

Modern forms of fraud

As the financial world becomes more digital, fraud continues to evolve as well. As newer forms of fraud develop in the real world, they may also appear in test questions.

🔑 NASAA’s current top investor threats

Social media & internet investment fraud

Social media and online platforms make it easier for fraudsters to reach large audiences quickly. NASAA is particularly concerned with the following online-based scenarios. Each is a discrete item:

Cryptocurrency-related investment fraud

With the popularization of cryptocurrencies (Bitcoin in particular), e-currencies have become a legitimate part of the financial sector. While many investors use cryptocurrencies to diversify their portfolios, there have also been numerous instances of fraud.

🔑 NASAA makes the following recommendation to investors:

Before you jump into the crypto craze, be mindful that cryptocurrencies and related financial products may be nothing more than public facing fronts for Ponzi schemes and other frauds. And because these products do not fall neatly into the existing federal/state regulatory framework, it may be easier for the promoters of these products to fleece you. Investing in cryptocurrencies and related financial products accordingly should be seen for what it is: extremely risky speculation with a high risk of loss.

Precious metal fraud

Investments in precious metals like gold, platinum, and silver have become more popular. To help investors understand this type of commodity, NASAA makes the following proclamations. Each is a discrete item:

⚠️ Gold investment scams named

• Gold investments held in third-party vaults that don’t exist
• Recommendations to cash out other investments for gold-colored coins (not actually gold)

Retirement accounts (like IRAs) do not allow the investor to gain access to the assets held in the account until retirement. Therefore, direct IRA investments in precious metals must be held with a third party. Extra caution and care should be exercised, and only reputable third parties should be utilized for this service.

Foreign currency exchange fraud

• Investors can bet on the value of currencies in the foreign exchange (known as ‘forex’) markets.
• A number of fraudulent forex products and services have been offered online and elsewhere, only to be worthless investments.
• ⚠️ Even when the product is legitimate, this market is volatile.

Promissory note fraud

• In a previous chapter, we discussed how promissory notes (a.k.a. commercial paper) could be exempt from registration if they meet certain qualifications. Notably, the exempt versions of promissory notes have recently been subject to significant fraud.

🔑 NASAA guidance, word-for-word:

Investors should be cautious about promissory notes with durations of nine months or less, as these notes generally do not require federal or state securities registration. Such short-term notes have been the source of most (though not all) of the fraudulent activity involving promissory notes identified by state securities regulators. These short-term debt instruments may be offered by little-known (or perhaps even nonexistent) companies and extend promises of high returns - perhaps over 15 percent monthly - at little to no risk. But if an investment sounds too good to be true, it probably is.

🔑 Numbers to memorize

• ⚠️ This is a prime example of the fraud/exemption scope distinction: the notes are exempt from registration, yet fraud in their sale is still fully actionable.

Sidenote: Enforcing anti-fraud laws

• An important point comes up when a person or security is exempt from registration. An exemption means many laws, rules, and orders may not apply.
• ⚠️ However, anti-fraud statutes apply in all circumstances, including situations involving exempt persons and/or securities.
• 🔑 Nothing escapes the anti-fraud provisions of the USA, and the state administrator can pursue action against a person or issuer even if they’re normally not subject to securities laws.

Key points

Warning signs of fraud

• Investment with guaranteed high returns or no risk
• A shortage of investments available (get in now!)
• Offshore investments that are tax-free
• Claiming information is an “investment secret”
• Encouraging a purchase because friends or family members did the same
• “Trust me! I’m an expert!”

Modern forms of fraud

• Social media & internet investment fraud
• Cryptocurrency-related investment fraud
• Precious metal fraud
• Foreign currency exchange fraud
• Promissory note fraud

Sources

Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.