7 Steps of How to Protect Yourself from Fraudulent Investors and Internet Scam

Protect yourself from fraud! Don't let the scammers take you for a ride! Image courtesy of Jean-Etienne Minh-Duy Poirrier.

At Merar we received numerous emails and calls, containing questions like “Is Investor X legitimate?” or “Investor Y wants me to pay money beforehand. What should I do? Should I pay?” We wanted to address these questions or at least to cover most of them in a single blog article and through this to help protect project owners on Merar and on the other investment networks.

At present Merar is one of the best-protected investment network sites:

• We use various proprietary technologies which helps us determine geographical and other information about our Internet visitors in real-time
• We perform high risk IP address and e-mail checking using external and internal black-lists
• Merar can record fraud behavior and see patterns that might be fraud

Whatever Merar does, however, there are and there always will be individuals with fraudulent interests and you must always be aware to potential fraud. 

It is our responsibility to develop software systems to protect you from basic forms of fraud, scam and spam, however it is your responsibility to understand who to trust, or not. These steps advise how to establish a system of trust with the potential investors:

1) Do not pay anything in advance

We have seen case when potentially fraudulent investors have asked project owners to pay $2,500 to $50,000 in advance in order to be considered for investment. In one case a project owner was asked to bring €300,000 in cash to swap it with €1,300,000 he would give in Swiss Francs!!? Never pay anything in advance. Genuine investors will not ask for consideration fees. 

Sergio Lopez-Pugh, one of the entrepreneurs on Merar shared with us his thoughts on how he communicated with someone who wanted him to pay beforehand: “Any fees involved on this transaction will be paid out of the funding monies and not in advance, not under any circumstances, not to you, not to your lawyers, not to your school friends or any relatives or acquaintances. We will simply not pay any fees to anybody unless that is after we have been funded and the monies are in our control.”

2) Think before travelling overseas to an investor

Investors conduct proper due-in order to decide should they put their money in your project or not. In order to conduct due diligence a genuine investor will want to come to see the facility and company and to appoint local advisors to investigate the business.

If you are asked to travel overseas to meet an investor, or if an investor does not want to see the business, ask whether it is likely that this is a partner with whom you can do business.

3)Ask for references and research publicly available information about the investor

As investors will conduct due diligence on you, you should conduct due diligence on the investor. Research public profiles such as Linkedin, and google searches. Before agreeing to an investment, ask to receive references from other investee companies and business partners. 

Always ask for information, contracts, people i.e. any historical track of investments in the past. Feel free to directly contact any of the historical partners. 

Many investment funds will show publicly available information about previous transactions. Even if they do not, such information will be available to business partners. 

Although Merar’s essence is to attract international investors to your projects, ask for information on the investors’ comfort with the business, financial, political and economic conditions in your region. 

4) Beware “investors” promising unusual (or easy) amounts

There is no such thing as a free lunch. Genuine investors will invest only what the business is worth. Promises of hundreds of millions of dollars for a small business are unrealistic and inevitably unavailable. 

Don’t become easy bait for investors who promise riches and who ask you to prepay certain amounts of money in order for them to “present you to their board, investment committee, etc.” If an investor has real interest in you and legitimate business to run, they will contact you, ask for more information and if really interested, they will come to see you and conduct throughout due-diligence. It’s simple like that, no payments in advance, and no millions on the table or in press releases.

5) Always ask yourself, why would this investor put his money in your business?

This might be a tricky one, I admit and especially for the start-ups. Why do people invest and in the end of the day, what are they investing in? At Merar we truly and deeply believe that people invest in other people, in other words they invest in you.

There can’t be a better article on this subject rather than Umit Dogan Demir’s thoughts on The right frame of mind for seed fund seekers (How to find investors, start and present investment project?) Ask yourself now, why would someone (especially when standing thousand miles away from you) decide based on information on the Internet only to invest real money in you without knowing you and without talking to you in person.

6) Ask, ask, and always ask!

Do not only feel free, feel obliged to ask the Merar team about the legitimacy of a certain investor (at any time you can email us on customer-service@merar.com). Approach your lawyer, ask your accountant, ask investment intermediaries (if available in your region) for advise, how to proceed on with potential investors. Never pay any money to an investor in advance.

7) Conclusion

The paradox of fraudulent investors is that they are a tiny minority. The vast majority of people are genuine investors. However being so small they can inflict significant losses to anyone, who decides to take unnecessary risks, make prepayments or participate in a scam .

Once you have paid money to a fraudulent person, it will be very difficult to recover that loss. It is in people's nature to like winning and this is solely the reason for so many lottery scams to exist. Distrust your prime instincts and review your collaboration with the prospect investors purely from business-wise perspective.

Feedback on this article and general thoughts on the topic are more than welcome! Share your experience and help us together build a better investment network for you!

* Note: As from 27 July 2012 Merar no longer provides free of charge legitimacy checks. Although we have impelmented the Triple Verification Payment Process back in May 2012, it is your responsibility and yours only to understand who to trust, or not on the newtwork, and outside it after you establish contact. Merar cannot be held responsible for any loss of income or revenue, loss of business, loss of profits or contracts, or any other loss caused by a contact with a user on the Merar website. For more information check our Terms and Conditions.