"What are the Legal Regulations HYIPs Appear to Be Breaking"
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Disclaimer: I'm not a lawyer and the following article on the legal situation regarding HYIPS is not professional legal advice.
Most investment companies in the United States are required to be registered with the U.S. Securities and Exchange Commission (SEC). However, there are exceptions, commonly known as hedge funds.
High Yield Investment Programs HYIPs Appear to be Legal Hedge Funds for "Little Investors."
Hedge funds are lightly or unregulated. They don't come under the same rules that apply to mutual funds. They're basically limited partnerships. Investors are limited partners and the HYIP administrator is the general partner.
There's nothing inherently wrong with this - it's how Warren Buffett got started. Years before he bought up Berkshire Hathaway and transformed that into his investment vehicle, he entered into partnerships with various family members and friends. There was no transparency. He refused to tell them what he was buying cause he knew it would upset them!
Hedge funds operate under one of two major exemptions -- Sections 3(c)1 and 3(c)7 of the Investment Company Act of 1940
Section 3(c)1 funds have fewer than 100 investors. I suspect that most HYIPs have more than 100 people sending them money, though I could (and hope!) I'm wrong. They no doubt want to have as many as possible.
Section 3(c)7 funds are for only "qualified purchasers." This is defined as someone with at least $US 5 million. It's safe to assume that few to none of HYIP investors are qualified purchasers.
To comply with these sections, hedge funds are sold via private placement under the Securities Act of 1933. That is, they may not be advertised or sold to the general public. To quote the SEC: "If you offer securities to anyone who does not meet the requirements, you may not qualify for any of the exemptions from filing with the SEC."
I believe that signing up people through a publicly available website probably constitutes advertising to the general public
Especially when you pay for or encourage you site to be advertised or listed on an HYIP monitor site and in HYIP forums on HYIP websites.
Other restrictions related to Regulation D, which is how most hedge funds are offered, means that investing in hedge funds is generally limited to accredited investors. That is defined as someone with a net worth of at least $US 1 million or an annual income of at least $200,000 in the past two years and reasonable expectation of that in the current year.
They must also offer investment information in a private placement memo.
Most hedge funds require a large minimum investment -- around $100,000 or more
That's not a legal requirement. But if the trader running the hedge fund is any good, they simply don't want to be bothered with somebody who has only $50 to invest. If they're that good, why should they?
Again, while I'm no lawyer, it's evident that High Yield Investment Programs are violating U.S. securities laws. Also, it's likely that the government would also be willing to prosecute HYIP monitor sites. These may actually be more vulnerable since they tend to be longer term. HYIPs come and go and but the monitor site remain up and functional and therefore easier to find and track.
I've dealt here only with U.S. law. Many other countries around the world in both the developed and developing world have similar laws relating to the registration of investment offerings. It's doubtful that High Yield Investment Programs register with any of them.
Of course, cross-border enforcement of securities laws is difficult in many countries.
So anybody who is considering sending a HYIP money should run a WHOIS check on the domain name registration. It'll probably be hidden to protect the con artist.
Just because they give a physical address in the U.S. or England doesn't mean they're actually residing in that country.
Some world HYIPs give addresses of such countries as Panama, Grand Cayman and Estonia. Some give no physical address at all.
So in conclusion I have to point out that when you send your money to an HYIP you're knowingly helping them violate securities laws if they're in a countries with such laws and/or you're sending your money to people in a country where you can never recover it.
One type of HYIP certainly appears to be illegal -- those promoting what's known to law enforcement as the Prime Bank Fraud.
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