Affinity fraud is when someone abuses membership or association with an identifiable group to convince a potential investor to trust the legitimacy of the investment. Common affinity groups include religion, ethnicity, profession, education, common handicaps, language, age, and any other common likeness or shared characteristics that allow investors to trust members of the group.
Rather than trusting a person or company due to a common affiliation with a given group, investors should obtain and review a disclosure document that explains the investment opportunity, the background of the management, the amount of money to be raised, the intended use of the money raised, and all the risks associated with making an investment.
Upon receipt, investors should review all disclosures with an independent accountant, attorney, or investment professional to receive an unbiased opinion of the investment and the person offering the investment.
Any person or company that seeks to pool investor money has likely created a security that must be:
- Properly registered under Utah law;
- Exempt from registration under Utah law; or
- A federal covered security notice filed in Utah.
In many cases, investment opportunities that fail to properly register their securities and offer those unregistered securities to Utah investors are in violation of other securities laws as well.
A person who promotes an investment opportunity may or may not need to be licensed with the Utah Division of Securities or Securities and Exchange Commission (SEC). A promoter may need to be licensed as a broker-dealer, broker-dealer agent, or issuer agent if they are effecting the securities transaction for compensation. If the manager of the investment opportunity uses investor funds to make investments in other securities, the manager may need to be licensed as an investment adviser or investment adviser representative.
In many instances where affinity fraud takes place and violations of securities laws occur, if the investors had researched the licensing requirements and licensing of the company and its agents beforehand, they would have uncovered many of the problems prior to investing.
When trust becomes a substitute for diligent research of an investment, investors often fail to ask the right questions and promoters of the investment fail to adequately disclose information to investors.
Demand disclosure documents that explain the investment opportunity, the background of the management, the amount of money to be raised, the intended use of the money raised, and all the risks associated with making an investment. Disclosure documents should be substantial (30 to 60 pages) and should be offered well in advance. Read the entire document and maintain a copy for your file.
Key Questions to Consider Before Investing
- Are you being offered the opportunity to invest because of your membership or relationship to an affinity group?
- Are respected group members or their names and positions being used to promote the investment?
- Are you being asked to make an investment decision based on your trust in the group whether it is being asked directly or merely implied?
- Is the person offering you the opportunity to invest emphasizing your membership in the group?
- Are you being asked to trust in the legitimacy of the investment because of your relationship or membership?
- Are you being encouraged to invest by the fact that other members of the group have invested?
- Are you being encouraged not to report any suspected fraudulent conduct by members in your group?
Contact the Division with questions or concerns - 801-530-6600