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114272 1 (1981-01-01)

handle is hein.gao/gaobacutp0001 and id is 1 raw text is: The Buyer Beware: Loss Through Investment Joseph Hf. Potter Mr. Potter is a supervisory auditor in the Financial and General Management Studies Division He joined GAO in 1974 and is presently auditor-in-charge at the Securities and Exchange Commission audit site in Washington, D C. Mr Potter has an M.B A degree from Morgan State University and a B S degree in accounting from the Univer- sity of Baltimore. He is a CPA (Maryland) and a member of the Association of Govern- ment Accountants. Jeffrey C. Steihoff Mr. Steinhoff is a group director in the Financial and General Management Studies Division's Accounting Systems in Operation Group in charge of both Government-wide accounting systems reviews and Securities and Exchange Commission reviews. He is a graduate of the College of William and Mary and has completed the Information Sys- tems Program at the Wharton School of the University of Pennsylvania He is a CPA (Virginia), and a member of the American In- stitute of Certified Public Accountants and the Association of Government Account- ants. He is also a past contributor to the GAO Review. SHYSTER COMPANY X.,. Did someone ever tell you that you can get in on the ground floor of a can't miss proposition that will make you rich In no time at all and with little effort or risk? Beware of such claims! They may cost you your life savings! A recent GAO assignment found that investors have lost hundreds of millions of dollars to unscrupulous promoters selling securities on the basis of misleading Information. These promoters, misusing an ex- emption from Federal securities requirements to avoid registration with the Securities and Exchange Commission, have swindled many of the Investing public. Many persons being defrauded are novice investors who do not have the knowledge or experience to be investing in unregistered securities. By the time they have realized that they bought securities or interests in fraudulent business schemes, it is too late to recover their money. A basic word of advice from GAOers who have looked into this area In depth-investigate be- fore you invest. You may be very sorry If you don't! Federal Requirements for Securities Sales To protect investors against fraud in the sale of securities, the Congress passed the Securities Act of 1933 and established the Securl- 20 ties and Exchange Commission (SEC) to enforce the law. The Se- curities Act requires companies selling stocks, bonds, and other securities to register them with the SEC. The SEC has no authority to evaluate the quality of the securi- ties, nor can it pass judgment on the merits of the risks involved; rather, the disclosure approach of the Securities Act permits a com- pany to offer its securities for sale so long as the company provides investors with sufficient, accurate information about the business It conducts. The SEC reviews a company's registration statement to ensure that sufficient disclosure has been made. The Securities Act also requires sellers of registered securities to furnish persons with a prospectus, or selling circular, which contains financial and other important information about the company. The purpose of the prospectus is to disclose adequate Information from the registration statement which a person can use in assessing the investment risk of the securities being sold. Not all securities, however, are required by the Securities Act to be registered with the SEC. The law permits a number of exemptions, one of which Is for transactions by an Issuer not involving any public offering. Under this exemption- commonly called a private place- ment-the Issuer can sell securities without registering with SEC to persons who are deemed not to need the protection of Federal securities law. Extent of Investor Losses Although the private placement exemption has been used since 1933 to legally raise billions of dollars for legitimate businesses, many unscrupulous promoters il- legally claim the exemption to avoid SEC registration and detection. As a result, they have been able to GAO Review/Winter 1981

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