5 Red Flags Indicating You've Fallen Prey to an Investment Scam - A True Story

It all began with an email from an alleged Swiss advisor representing a wealthy client interested in investing in MAXION. They had found my contact information on my social media profiles. What started as an innocent email exchange quickly escalated into a phone call, where the advisor presented a promising investment opportunity. We agreed on a $1.75M investment via a safe note with a $10M valuation. Alarmingly, they didn't conduct proper due diligence, never requesting financial statements or access to our data room.

The next step involved an in-person meeting in Barcelona, which became a logistical nightmare due to flight delays caused by storms in Dubai earlier this year. After finally meeting, the "partners" invited us to dinner and mentioned needing proof of funds through a cold ledger, but we avoided discussing business further that night.

The negotiations continued in Dubai, and with it our doubts on this party's authenticity. During further discussions, the alleged advisor introduced a hefty $300,000 commission, which was later negotiated down to $250,000, for the $1.75M investment, all to be done in cryptocurrency. They demanded proof of funds and insisted we purchase 250,000 USDT (Tether, a cryptocurrency pegged to the US dollar) before proceeding with the transaction. We refused because as a startup, we naturally didn't have that amount readily available. Their insistence on conducting transactions without third-party involvement and using cold wallets raised even more suspicions. Which is when we decided to carry out an in-depth investigation.

Our investigation revealed fake passports, names, companies, and scam reports. They operated under aliases, with fabricated websites and forged investor credentials. We found social media profiles without pictures and discovered they were using real business licenses from Switzerland but pushing to meet only in Spain.

What to do when faced with such a situation?

If you find yourself in a similar situation, immediately halt any engagement. Report the incident to authorities such as Europol and the European Financial and Economic Crime Centre (EFECC). Check scamadviser.com for similar reports, and connect with others who may have encountered the same scammers.

In our case, we lost $12,000 in travel expenses and endured weeks of stress, but thankfully we weren't harmed. This cautionary tale is a reminder of what not to do and highlights critical warning signs to watch for. Our goal is to catch these scammers and prevent others from falling victim to similar schemes. We hope to secure honest investment for our seed round and turn this experience into a lesson that helps others avoid scams.

Take Note of these Red Flags

1. Flat success fee requests
Be wary when the middleman or person who connected you to the investor asks for a flat success fee instead of a percentage of the investment. Success fees typically range from 1-2.5% of the investment amount. An upfront flat fee is a red flag indicating potential fraud. Legitimate intermediaries usually prefer a percentage-based fee that aligns their interests with the success of the investment.

2. No camera or photo availability
If the middleman or investor refuses to turn on their camera for video calls and there's no trace of them on any websites, WhatsApp pictures, or social media, it's a major warning sign. Authentic investors and advisors will have some form of online presence and transparency. In today’s digital age, a lack of visual or social proof is suspicious and should prompt further investigation.

3. Unnecessary travel and miscellaneous expenses
Be cautious if you're asked to travel and spend money before any investment is committed. Legitimate investors usually handle preliminary negotiations remotely and will cover travel costs if an in-person meeting is necessary. Scammers often use elaborate schemes to make you incur costs, which is a tactic to gauge your willingness to commit financially without giving anything substantial in return.

4. Restricted communication with the investor
If the middleman prevents you from speaking directly with the investor, question the legitimacy of the deal. Direct communication with the investor is crucial for building trust and verifying the authenticity of the investment offer. Middlemen who block direct contact might be hiding the fact that there is no real investor behind the scenes.

5. Excessive secrecy and built pressure
If the middleman or investor exhibits excessive secrecy or pressures you to make quick decisions, this is another red flag. Authentic investment deals involve thorough vetting and open communication. Scammers often create a false sense of urgency to push you into making hasty decisions.

How to Avoid Investment Fraud

1. Research Thoroughly
Use websites like scamadviser.com to check the credibility of companies and individuals involved in the investment. Look for domain registration dates and reverse Google image search any photos you can find. Consistent online presence and long-standing domain registrations can be indicators of legitimacy.

2. Verify Through Trusted Sources
Crunchbase.com is a valuable resource to legitimize companies and investors. Ensure the entities you're dealing with have a solid track record and a legitimate online presence. Cross-referencing multiple sources of information can help verify claims and uncover discrepancies.

3. Insist on NDAs for Sensitive Information
If someone from a similar industry reaches out asking for privileged information, insist on a mutual NDA. Refusal to sign an NDA is a clear sign they're phishing for information. Protecting your data is crucial, and legitimate investors will understand and respect this need.

The Role of Social Media in Investment Fraud

I've been very vocal about my journey as a first-time tech founder on social media. This openness gives more people access to information related to me and my business. While I wouldn't change my approach, it's crucial to be diligent. Transparency can attract genuine interest but also expose you to potential scammers. Always verify the identity and intentions of those who contact you through social media.

One in four people who reported losing money to fraud since 2021 said it started on social media. Reported losses to scams on social media during the same period hit a staggering $2.7 billion, far higher than any other method of contact.