U.S. securities law provides certain exemptions that allow privately owned companies to issue shares of unregistered stock to select, qualified investors. In the "doctor advisory scam", an unregistered security scam, exemptions were used to make unregistered securities appear legitimate.

In the August 6, 2006 edition of Medical Economics, author Berkely Rice describes how it typically works: "…thousands of doctors receive faxed letters from a CEO inviting them to join the medical advisory board of a small company with a 'breakthrough' medical product. In exchange for serving on the board, the physician will receive a specified number of shares of stock and, sometimes, expense-paid trips to annual meetings in resort locations."

After doctors sign up to join a board, they are contacted by a "company executive" to invest in the company through a private stock offering with promises of astonishing returns once the stock goes public. Unfortunately, the "company executive" is typically a telemarketer earning a steep commission on each "stock" sale. Oftentimes, not only is the stock bogus, but the breakthrough product also does not exist.

(For more on this topic, read Wham Bam Micro-Cap Scam and Stop Scams In Their Tracks.)

This question was answered by Katie Adams.

  1. Is a financial advisor allowed to pay a referral fee?

    A financial advisor is allowed to pay a referral fee to a third party for soliciting clients. However, the Securities and ... Read Full Answer >>
  2. Do financial advisors get paid by mutual funds?

    Financial advisors are reimbursed by mutual funds in exchange for the investment and financial advice they provide. A financial ... Read Full Answer >>
  3. Do financial advisors prepare tax returns for clients?

    Financial advisors engage in a wide variety of financial areas, including tax return preparation and tax planning for their ... Read Full Answer >>
  4. Why is fiduciary duty so important?

    Fiduciary duty is one the most important professional obligations. It basically provides a much-needed protection for individuals ... Read Full Answer >>
  5. Do financial advisors have to find their own clients?

    Nearly all financial advisors, particularly when new to the field, have to find their own clients. An employer may provide ... Read Full Answer >>
  6. Do financial advisors get drug tested?

    Financial advisors are not drug tested by any federal or state regulatory body. This means you may receive your Series 6, ... Read Full Answer >>
Related Articles
  1. Professionals

    10 Must Watch Documentaries For Finance Professionals

    Find out about some of the best documentaries that finance professionals can watch to gain a better understanding of their industry.
  2. Professionals

    Fund and ETF Strategies for Volatile Markets

    Looking for short-term fixes in reaction to market volatility? Here are a few strategies — and their downsides.
  3. Professionals

    Top Tips for Maximizing Social Security

    Between delaying filing, claiming strategies and taking advantage of special marital benefits, there are several ways to maximize Social Security.
  4. Options & Futures

    Pick 401(k) Assets Like A Pro

    Professionals choose the options available to you in your plan, making your decisions easier.
  5. Investing Basics

    5 Things To Ask Before Hiring A Financial Advisor

    Choosing a financial advisor isn't an easy task. Here's a list of the most important things to consider when planning for your financial future.
  6. Personal Finance

    How To Choose A Financial Advisor

    Many advisors display similar skillsets that can make distinguishing between them difficult. The following guidelines can help you better understand their qualifications and services.
  7. Professionals

    The Best Schools for Financial Planning

    Among the best universities for financial planning are the University of Georgia, Boston University, The College of Financial Planning, Texas Tech, San Diego State, Baylor, Fairleigh Dickinson ...
  8. Retirement

    How to Choose 401(k) Investment Options

    401(k) plans have become an integral part of retirement planning for good reason.
  9. Mutual Funds & ETFs

    Is Your Financial Advisor Picking the Right Mutual Funds?

    Learn about the different types of mutual funds and how to know if your financial advisor is choosing the right funds for you based on your investment goals.
  10. Professionals

    How Brokers are Candy-Coating Alternatives

    Alternatives have become a sexy choice for many advisors. But they also come with additional risks that are not always clearly spelled out to clients.
  1. Black Money

    Money earned through any illegal activity controlled by country ...
  2. Financial Singularity

    A financial singularity is the point at which investment decisions ...
  3. Open Architecture

    The option offered by an investment firm to let its clients invest ...
  4. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  5. Endowment Effect

    The endowment effect describes a circumstance in which an individual ...
  6. Anchoring and Adjustment

    Anchoring and adjustment is a cognitive error described by behavioral ...

You May Also Like

Hot Definitions
  1. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  2. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  3. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  4. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
  5. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  6. Capitalized Cost

    An expense that is added to the cost basis of a fixed asset on a company's balance sheet. Capitalized Costs are incurred ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!