Typically, a "cold caller" makes unsolicited calls to potential investors, cajoles them into deciding to purchase certain securities, and then, becomes unavailable for contact after the investor sends the money for that purchase. As a result, the investors cannot obtain the securities although they made the payment, and they also cannot get back the money they paid. Investors need to be more careful and vigilant, as cold callers have been using more varied and more sophisticated tactics. (For example, some cold callers execute transactions properly and make profits for investors at first. Then, they solicit bigger transaction and make the investors transfer the money for it. After that, the cold callers disappear.)
In most countries, a person is required to be registered with or licensed by the national regulatory body before conducting solicitation of securities transactions. However, cold-callers do not have such registration or licenses. One of the characteristics of cold callers is that it is extremely difficult to discover their whereabouts. Many cold callers indicate their office locations on their websites (or documents sent to investors), but they rarely operate at that location. Apparently, cold callers intentionally hide their whereabouts, so that they can avoid being visited by the investors they approach. Notably, it is very typical that cold callers claim that they are located in a country that is different from the location of the prospective victim. For example, there are many cases in which cold callers that have approached American or European investors and claim to have an office located in Japan (at a building in Tokyo, for instance.)
Investors should be very careful and vigilant about conducting business with these entities, potentially opting against conducting any transactions via these entities. Recognizing the need for cooperation among securities regulators in order to combat cold calling, the International Organization of Securities Commissions (IOSCO) - the international body consisted of securities regulators around the world - publicized the following statement for investors alert on cold calling in February 2002:
An IOSCO Technical Committee Release:
"Cold Calling" - Investor Alert
1 February 2002
The Technical Committee of the International Organization of Securities Commissions (IOSCO) today issued the following Investor Alert: There has been an upsurge in cold calling activities in some countries. "Cold calling" refers to the practice where a person makes unsolicited calls to a potential investor seeking to sell them securities during the call or in the future. Generally speaking, a person requires some form of regulatory authorisation or approval in the country in which the investor resides in order to engage in a securities business. Cold calling organizations may not have those approvals and may be involved in illegal investment schemes in which investors lose money. The securities they seek to sell can be in small, unknown companies that are highly risky or are sometimes part of an illegal scheme. Even if the cold caller is licensed and is offering listed securities, high-pressure tactics or other inappropriate conduct may be used to secure a sale. Therefore, investors should not make an investment solely on the basis of a cold call. At a minimum, before committing any money, investors should check the professional register of licensed securities dealers, investment advisers and their representatives in the jurisdiction of their domicile and the jurisdiction where the cold caller claims to operate. Investors also should be extremely sceptical if a cold caller promises spectacular returns or "guaranteed" profits. If the deal sounds too good to be true, it probably is. In issuing this Investor Alert, Mr David Brown, Chairman of the IOSCO Technical Committee, said: "By using high pressure selling tactics and promising high returns on share the cold caller attempts to induce an investor to often send large amounts of money to a bank account abroad. In return the investor is promised shares or other securities. Cold callers may not be licensed to deal in securities in the jurisdictions in which they operate or in the jurisdiction into which they cold call. Cold calling firms use constant and high pressure sales tactics, often have websites and glossy brochures and operate from virtual offices, using phone and mail forwarding services in a jurisdiction in which they claim to have an office. Before investing on the basis of a cold call, investors should:
- Check with the securities regulator (*) in their jurisdiction and the jurisdiction in which the cold caller claims to operate;
- Independently research the investment; and
- Consider getting advice from a licensed or registered professional."
- *Contact details of relevant securities regulators are available at www.iosco.org
- For further information on this matter contact: Mr Philippe Richard Secretary General of IOSCO Tel: +34 91 417 5549 Fax: +34 91 555 9368 E-mail: firstname.lastname@example.org
Generally speaking, an entity is required to have some form of authorization by the regulators in the country where the investors that it would solicit reside, in order to conduct financial/securities business. There is a possibility that cold callers do not have such authorization and they are involved in illegal activities by which investors lose their money.
Therefore, investors should not make an investment solely on the basis of "cold calls." Before making an investment decision and paying money, investors should, at the very least, check whether the entities are given registration and/or authorization as securities dealers, investment advisers, etc., by the regulators in the jurisdictions where the investors reside and the entities claim to operate. Investors also should make serious inquiries into the legitimacy of the entity if the entity promises spectacular returns or "guaranteed" profits.
The IOSCO Asian Pacific Regional Committee (APRC) also announced a press release (PDF:95KB) in February, 2002. The APRC members, including the FSA, expressed their intension to enhance cooperation, mutual assistance and information-sharing to detect illegal activities, as well as to publicize the names of unlicensed/unregistered entities, in order to prevent investors from becoming victims by fraudulent activities.