“A friend is someone who knows where the bathroom is at your house without having to ask.” While this may be a humorous way of defining a friend, most of us involved in social media have many “friends” who would not meet this definition.
While the internet is a fantastic tool for many things, including keeping in touch with those near and dear to us, social media can have risky outcomes for investing. It’s entirely possible to perceive a close relationship with someone you don’t actually know beyond the screen. Unfortunately, this can be dangerous.
If you follow Paul on Twitter, and are constantly seeing him post about his new house, or expensive vacations, it’s normal to wonder how he can afford it. If you comment saying how lucky he is on the Instagram photos of his new car, and Paul replies saying that you could be, too, if only you got in on the brilliant investment that’s making him all that extra money, you might be tempted to do so. After all, you know Paul, right? You know his investment is paying off - you’ve seen the pictures of his car. Not so fast! Scam artists love to prey on people’s trust in those they know, or feel they do. This is known as affinity fraud, and social media can make us feel like we ‘know’ a person, or group of people, much better than we actually do.
Affinity fraud is defined as: A type of scam that usually occurs in a group setting (ethnic groups, clubs, associations, religious groups, etc.). Scammers will gain trust by joining groups where they can share common interests; it is often easier to trust someone who is like you or has similar interests to you. Once trust is gained, it is easier to execute a scam.
Accredited investor and friends and family exemptions
Most of us have a friend that uses social media to promote their business. While Cathy from your coffee shop who sells cosmetics is probably harmless, what about people who are trying to get you to invest in their business, not just sell you product?
Alberta securities laws specify what information must be available to potential investors in any venture. This is so that each potential investor will have access to the same information as others and enough information to determine whether the investment is suitable for that person. An exception is made for one group of people, known as accredited investors.
An accredited investor is defined as: A government, financial institution, large company, or individual with a required level of income or assets, permitted to invest in certain types of securities sold without a prospectus.
In terms of income or assets, generally, the less you have, the less you can afford to risk (and potentially lose).
Under securities laws, there is also an exemption from the prospectus requirement to allow investing for those who are not “Accredited Investors”– the so-called “Family, friends and business associates” exemption. This exemption was made for specific relatives and close friends of the business owner/operator who are presumed to know the person they are investing with and their business skills/plans well enough to make an informed decision. Examples of this would be someone who is not accredited, but wants to help their brother open a restaurant, or their best friend expand her hair salon. Those who want to invest are required to sign a form stating that they are either a) accredited or b) a close friend or one of the specified family members of the person offering the investment.
If you are one of Harry’s herd of Facebook friends who are asked to invest in his start-up, think about how well you know your friend Harry in real life (IRL, as they say online), before signing that form that says you are his friend or family member. Doing so means that you have agreed to invest without the benefit of all the information that Alberta securities laws says you are otherwise supposed to get. It’s a big decision, and the wrong one can mean you lose all of your investment, so think about whether or not you feel you have enough information, including about your “friend.”
Hi, I’m Heather Hartmann, the Communications Advisor responsible for social media at the ASC. From the YouASC’d blog to Twitter, Facebook and YouTube, in the three years I’ve been here I’ve been working to grow the ASC’s digital presence, opening up new ways for us to communicate with you. Keep an eye on our accounts to stay current with news that may help you as you invest: