Five questions to ask before investing

Sometimes we get calls from clients asking us to research certain investments they’ve heard of that promise income without risk. Putting aside the question of whether or not such investments are halal, investors may be unknowingly falling for a potential Ponzi or pyramid scheme. Keep in mind that such a scheme could go undiscovered for decades. Madoff’s Ponzi scheme is believed to have started in the 1970s, but he wasn’t arrested until 2008. Here are 5 questions you should ask before investing your hard-earned money: 1. Is this a security? If so, is it registered with state or federal regulators? Under federal law, an investment is a security if it passes the Howey test. Under Howey, an investment contract is “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” An investment is almost certainly a security if its marketing materials (website, brochures, etc.) promise great returns or guaranteed income. Why does it matter? If something falls within the definition of a security under applicable law, it will be governed by extensive rules and regulations that can be