In an economic landscape defined by uncertainty, the promise of a fast, high-return investment can feel like a lifeline. It’s a powerful lure, and one that criminals are exploiting with terrifying efficiency. According to the Federal Trade Commission (FTC), consumers reported losing over $5.7 billion to investment-related fraud in the last reporting year, a staggering figure that has more than doubled since the previous period. This isn’t just a background threat; it’s a clear and present danger to anyone trying to build wealth. Understanding the mechanics behind this surge is the first step toward protecting your hard-earned capital.

The critical question we must answer is: how do investment scams work, and what do they look like in the real world? The answer is more complex than a simple ‘get-rich-quick’ scheme, involving sophisticated psychological tactics and a deep understanding of human desire and fear.

This comprehensive guide is designed to arm you with the knowledge needed to navigate this treacherous environment.

What is an investment scam?

An investment scam is a fraudulent scheme designed to trick you out of your money by presenting a fake investment opportunity. These scams are built on a foundation of deception: the promise of high, often guaranteed returns with little to no risk. This core promise is a major red flag, as all legitimate investments carry some level of risk. Fraudsters use a variety of tactics and create highly professional fronts—including sophisticated websites, convincing documents, and persuasive sales pitches—to appear legitimate and gain your trust. The ultimate goal is to get you to invest your funds into their scheme, after which they disappear, leaving you with significant financial losses. There are many types of investment scams, from classic Ponzi schemes to modern cryptocurrency fraud, but they all share this common element of deception.

Signs of an investment scam

Being able to spot these red flags is not about being a financial expert; it’s about being a cautious and observant consumer. The presence of even one of these indicators should be enough to make you stop, step back, and scrutinize the opportunity with extreme skepticism. Treat this list as your personal fraud detection checklist:

  1. Promises of guaranteed high returns with no risk: This is the number one red flag. All investments carry risk, and high returns are never guaranteed. Legitimate professionals will always disclose potential risks.
  2. High-pressure sales tactics: Any pressure to act now or invest immediately is a massive warning sign. Legitimate opportunities allow time for thought and due diligence.
  3. Unsolicited contact: Be extremely wary of unsolicited emails, social media messages, or phone calls about investment opportunities. Legitimate investment firms rarely cold-call for business in this manner.
  4. Unlicensed sellers and unregistered products: Most authentic investment professionals and products must be registered with regulatory bodies like the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA). Always verify their credentials.
  5. Requests for unconventional payment methods: If you’re asked to invest using wire transfers, gift cards, or cryptocurrency, it’s almost certainly a scam. These methods are favored by criminals because they are difficult to trace and nearly impossible to reverse.
  6. Vague or overly complex explanations: Scammers often use confusing jargon and complex terminology to overwhelm you and prevent you from asking probing questions. If you can’t understand it, don’t invest in it.
  7. Lack of professional documentation: A legitimate investment will be accompanied by official documents like a prospectus or an offering circular that detail the investment, risks, and fees. A lack of such paperwork is a clear danger signal.

Today’s common investment scams

Investment scams are on the rise, becoming more sophisticated and harder to detect with each passing year. However, they are not unbeatable. By understanding how investment scams work at a psychological level and by familiarizing yourself with the most common investment scam examples, you strip them of their power. Fraudsters thrive in darkness and confusion; your knowledge is the light that exposes them.

1. Ponzi scheme

Named after the infamous fraudster Charles Ponzi, this scheme promises high returns, using money from new investors to pay profits to earlier investors. In truth, there is no actual underlying investment generating returns; the money is just being shuffled around. Ponzi schemes inevitably collapse when the scammer can no longer attract enough new investors to pay the existing ones, or when a large number of investors try to cash out at once. The most infamous modern example is Bernie Madoff’s multibillion-dollar scheme, which ran for decades by building a reputation for steady, reliable returns.

2. Pyramid scheme

Often confused with a Ponzi scheme, a pyramid scheme has a key difference: participants make money by recruiting new members. While they may sometimes offer a low-quality or overpriced product to appear legitimate, the real emphasis is on the fees new recruits pay to join. Those at the top of the pyramid receive commissions from their recruits, and from the recruits of their recruits. The structure is unsustainable by design, as it requires an exponential increase in participants. Ultimately, the people at the bottom of the pyramid are guaranteed to lose their money when the pool of potential recruits runs out.

3. High-yield investment programs

High-yield investment programs promise incredibly high, daily or weekly returns presented in slick, professional websites with dashboards that show your profits accumulating in real-time through so-called secret trading methods, investments in exotic financial instruments, or proprietary AI-powered trading bots. In reality, these online investment fraud schemes are often unregistered and unregulated. They use new investors’ money to pay the initial high returns, luring victims into investing more significant sums before the platform inevitably shuts down and the operators vanish.

4. Crypto & non-fungible token scams

The complexity surrounding cryptocurrencies and non-fungible tokens have created a fertile ground for scammers, preying on investors’ fear of missing out on the next big digital asset. A common tactic includes rug pull, where developers pump up a new token through aggressive marketing, then disappear with the investors’ funds, causing the token’s value to plummet. Another is the pump-and-dump, where fraudsters use misinformation to artificially inflate the price of a low-value coin before selling their own holdings at the peak, crashing the coin’s price. Fake celebrity endorsements and fraudulent Initial Coin Offerings are also rampant.

Related: How to Spot a Crypto Scam: The Top Red Flags to Watch For

5. Social media & finfluencer fraud

The rise of financial influencers, or finfluencers, on platforms like TikTok, Instagram, and YouTube has opened a new avenue for scams. Fraudsters create fake profiles mimicking popular influencers or hack into legitimate accounts to promote fraudulent investment schemes, leveraging the trust the influencer has built with their audience to lend credibility to the scam. These promotions often involve crypto pump-and-dump schemes or direct victims toward fraudulent trading platforms.

6. Pig butchering scam

Based on the concept of fattening up the pig before slaughter, this cruel and long-term scam combines romance with investment fraud. A scammer contacts a victim on a dating or social media platform and spends weeks or months building a deep, often romantic relationship. Once trust is established, the scammer will casually introduce an exclusive investment opportunity, usually involving cryptocurrency. They guide the victim through the process, starting with small amounts and showing impressive gains. After this fattening period, the scammer convinces the victim to invest their life savings, then disappears along with the fraudulent investment platform, leaving the victim emotionally and financially devastated.

7. Advance fee and recovery room scams

The advance fee scam promises access to a large sum of money—an inheritance, investment profit, or lottery winnings—in exchange for a small payment to cover taxes, processing fees, or legal costs. The promised windfall never materializes, and the scammer keeps the fee. This is followed by the recovery room scam where another group of fraudsters posing as a law firm, government agency or recovery service will contact the victim. The group will claim to help the victim recover their funds after they pay an upfront service fee. Desperate, the victim pays and is scammed a second time.

8. Pre-IPO and private placement scams

In pre-IPO and private placement scams, fraudsters create a sense of elite opportunity by offering would-be investors exclusive access to shares of companies about to go public or private placements. Common warning signs include unregistered brokers, non-disclosure agreements (NDAs), fabricated financial statements, and sketchy business plans, citing supposed regulatory loopholes to justify their lack of transparency. Victims then transfer significant sums to offshore accounts, only to discover that the investment never existed.

9. Viatical & life settlement investment scams

Viatical and life settlement investments involve a terminally or chronically ill life insurance policy holder—the scammer—selling their fake policy at a discount. The investor is supposed to receive the death benefit when the insured passes away. Some scams involve confusing contracts or off-shore custodians to hide their activities. Victims, however, may not actually hold any ownership of real insurance policies, and promised payouts never materialize. Others may push the investment as low risk and unaffected by stock market volatility.

10. Real estate investment scams

In real estate scams, fraudsters may create bogus crowdfunding platforms, advertise non-existent rental or vacation properties using stolen photos, orchestrate timeshare resale schemes, or sell shares in fake Real Estate Investment Trusts. The scammer promises exclusive access to the pre-vetted luxury real estate investment. After investing, the project and the platform abruptly vanish. Warning signs of real estate scams include forged deeds or documents, aggressive pressure to send “escrow” payments by wire, refusal to meet in person or show property, unusually high promised yields, or unlicensed promoters.

→ Related: 6 Ways to Outsmart Real Estate Scammers

11. Prime bank investment schemes

Prime bank investment schemes offer access to secret, high-yield financial instruments supposedly reserved for privileged investors. Promoters will use banking jargon like prime bank notes, bank guarantee programs, or standby letters of credit, promising up to 50% returns in just 30 days—through risk-free international trading programs. In reality, these instruments do not exist. A scam will present professional-looking documentation such as forged certificates, tranche participation agreements, or letters purportedly from major international banks. Scammers appeal to investors’ desire for exclusivity and secrecy, and sometimes provide NDAs. They will reference fabricated government connections, or cite unverifiable regulatory loopholes.

12. Exempt securities scam

Exempt securities scams exploit a regulatory loophole where certain investments don’t require SEC registration. Fraudsters pitch these unregistered offerings as exclusive opportunities with high, guaranteed returns. Because they bypass standard disclosure and oversight, scammers can easily sell worthless or non-existent assets, leading to significant financial losses for unwary investors. In reality, there is no secret investment program at genuine prime banks.

13. Hedge fund-related fraud

Hedge fund fraud encompasses deceptive acts, sometimes by professional fund managers, such as misrepresenting investment strategies, inflating asset values to boost performance fees, or misappropriating funds. Such misconduct exploits the intricacies of investment vehicles, leading to significant financial losses for clients.

14. Micro-cap fraud

This type of securities fraud involves the manipulation of low-priced stocks from small companies. Perpetrators often use pump-and-dump tactics, artificially inflating a stock’s value with misleading hype. They then sell their shares at the peak, leaving other investors to suffer major losses as the price plummets.

15. Unregistered investment products

Unregistered investment products are securities not listed with regulatory bodies like the SEC. While some exemptions exist for legitimate offerings, many are high-risk or fraudulent. They lack the same disclosure requirements and investor protections as registered products, exposing investors to potential significant losses and limited legal recourse.

16. Promissory note or fixed-interest fraud

Promissory note scams offer investment notes or certificates that promise unusually high, fixed interest rates with little or no risk. Scammers fabricate the existence of these notes or pose as a reputable company to project safety and legitimacy, using official-looking sales presentations, documents, and industry jargon. They connect with the victim through targeted ads on social media, sophisticated phishing emails and SMS, messaging groups filled with fake members, and professional-looking websites and mobile apps. Remember, legitimate promissory notes must be registered with a state or the national securities commission. Fraudulent schemes will claim exemption to these requirements or encourage investors to forgo official verification.

17. AI-powered deepfakes and voice scams

AI-powered scams use advanced technology to create highly convincing deepfake videos and cloned voices, making it harder to distinguish fact from fiction. Imagine seeing a video of a famous tech CEO announcing an exclusive pre-IPO stock offering or a renowned investor endorsing a new cryptocurrency—only the video is fabricated and the investment opportunity is worthless. Or receiving a call from your financial advisor whose voice sounds identical to the real person, urging you to wire funds to a new account immediately.

Proactive steps to thwart scammers

A truly robust strategy involves building a proactive financial fortress that makes you a difficult target for fraudsters. This requires cultivating healthy skepticism and integrating a few key verification habits into your financial life. If you suspect you are being targeted for an investment scam, prompt action is critical. Here are some steps:

Question everything and everyone

Cultivate healthy skepticism by asking probing questions and demanding clear, straightforward answers. Who runs the company? Where are they located? How, specifically, does the investment generate returns? Can I see audited financial statements? Where is my money being held? If the promoter is evasive, dismissive, or becomes agitated by your questions, walk away immediately. A legitimate professional will welcome scrutiny and provide detailed information to a potential investor. It is your money, and you have every right to know exactly where it is going and what risks are involved.

Independent verification

Never take a seller’s claims at face value. Using free, publicly available tools, you can check if an investment professional is licensed and has any disciplinary history. Conduct a simple online search of the company or individual’s name along with terms like scam, review, or complaint. Do not rely on the links or phone numbers provided by the promoter; find the official contact information independently. Here are ways you can research an investment opportunity before you commit:

  1. Verify registration: Check both the investment and the seller with official regulators. Use SEC Electronic Data Gathering, Analysis, and Retrieval system for public filings and FINRA BrokerCheck tools.
  2. Analyze offering documents: Review prospectuses, private placement memoranda, or other disclosure materials. Legitimate investments clearly outline risks, fees, and management details.
  3. Cross-check management backgrounds: Research the leadership team’s credentials and disciplinary histories. Look for previous lawsuits, negative press, or unexplained gaps in their track records.
  4. Scrutinize independent reviews: Seek out independent, reputable third-party reviews—not just testimonials on the promoter’s website. Search for complaints on regulatory sites and trusted financial forums.
  5. Use technology tools: Leverage security solutions such as McAfee’s Web Advisor to evaluate if a company’s website is legitimate or associated with known scams. For added protection, utilize a scam detector to spot risky texts, emails, and videos.

Key takeaways

The world of investing holds incredible potential for wealth creation, but it is also a minefield of deception. When confronted by a possible investment scam, always prioritize caution, skepticism, and due diligence over enthusiasm. Reject the scammer’s urgency, question promises, and independently verify every claim.

By staying informed and vigilant, you can build a financial future that is resilient, secure, and free from the devastating impact of fraud. To help you deter scammers and nip the fraud in the bud, trusted and proven technology solutions such as McAfee’s Web Advisor and Scam Detector can spot dubious online attempts by scammers, whether it is through a website, text, email, and video.