FRAUD IN THE SALE OF UNREGISTERED SECURITIES
OF TELECOMMUNICATIONS TECHNOLOGY VENTURES
There are many legitimate telecommunications technology
companies that have raised capital through lawful and honest means,
often through public offerings of securities registered with the
SEC. In the last year, however, the SEC has instituted ten
injunctions and is investigating other cases regarding fraudulent,
unregistered sales of securities in ventures involved in wireless
cable, specialized mobile radio, interactive video and data
services, and similar telecommunication technologies. State
securities administrators and the Federal Trade Commission have
also brought numerous other enforcement actions in this area.
Investors should be aware of these frauds.
The SEC is particularly concerned about promoters of
fraudulent telecommunications technology ventures targeting
retirement funds. For example, promotional materials typically
include all documentation needed to transfer IRA funds to make the
investment. The SEC has discovered instances in which promoters
falsely represent that the Internal Revenue Service had approved
the investment for IRA funds, and misstate that they had been
encouraged by the IRS to contact the investor. The IRS does not
approve particular investments for IRA funds; nor does it provide
the names of IRA investors to promoters.
These schemes have other common features. Fraudulent
telecommunications technology ventures frequently take the form of
limited liability companies and partnerships. Promoters often
falsely state that investments in the ventures are not subject to
the securities registration requirements of the federal securities
laws. The ventures are often promoted through radio and
television, frequently through so-called "infomercials," that
solicit investors to show their interest by calling toll-free
telephone numbers. After doing so, potential investors routinely
are subjected to high-pressure telephone sales pitches. These
sales pitches are often repeated in glossy brochures that lend an
air of legitimacy to the promotions.
Among the more glaring fraudulent inducements made in these
sales pitches are convincing (but baseless or unreasonable)
predictions of enormous profits to be made in a short period of
time, accompanied by forced urgency to invest. At the same time,
promoters fail to disclose accurately and adequately the highly
speculative nature of the investment and how the offering proceeds
will be used. The SEC has encountered particularly inadequate
disclosure regarding sales costs, which may range as high as
60 percent of gross proceeds, and "consulting" and other fees paid
to promoters and their affiliates. After these offerings are
concluded and the sales commission and insider payments are made,
investors are often left with an interest in an entity that has
little or no funds to do business; in other words, a security worth
little or nothing.
Other common fraudulent inducements to buy unregistered
securities in telecommunications technology ventures include false
statements that licenses are owned or are under control of the
venture, and that the enterprise is operationally ready or is
farther along toward operational readiness than is the case.
Additionally, promoters commonly fail to disclose past criminal and
civil law enforcement histories and material contingencies (such
as required regulatory approvals and the acquisition of adequate
additional capital) that must be met before full operations may
begin.
The SEC is cooperating with other concerned federal agencies,
state securities administrators, and the North American Securities
Administrators Association, Inc. (NASAA) to combat
telecommunications technology securities fraud. But, investors
must be aware that their first line of defense against securities
frauds is their own diligence and skepticism in evaluating a
proposed investment -- especially one not registered with the SEC.
For example, investors should consider contacting legitimate
industry trade groups BEFORE making a proposed investment. These
groups may often offer information useful to potential investors,
such as checklists that enable knowledgeable evaluation of a
proposed investment. Other steps that may enable investors to
protect themselves include: discussing promoters' claims with
registered securities professionals and other advisers you know and
trust; exercising extreme caution when you are solicited,
particularly over the telephone, to buy securities that are not
registered with the SEC; and checking the broker-dealer
registration and disciplinary histories of promoters. Remember
that "if it looks too good to be true," it probably is.
The phone number of your state securities administrator may
be obtained from NASAA by calling (202) 737-0900. The disciplinary
history of registered broker-dealers may be obtained by calling the
hotline maintained by the National Association of Securities
Dealers, Inc., 1 800 289-9999.
http://www.sec.gov/investor/pubs/wireless.htm