A number of well known high-tech companies are attracting headlines with their plans to go public, but beware of invitations to buy “pre-IPO” shares of Facebook and other popular companies.
“Investor demand for shares of the private stock of high-profile social media companies – such as Facebook, Groupon, Twitter and Zynga – has been surging in recent months,”
said a recent Investor Alert from the Financial Industry Regulatory Authority. “But social media has also become the latest hook on which con artists can hang a scam. In this case, fraudsters dangle the promise of wealth from the sale of ‘pre-IPO’ shares.”
An IPO, or initial public offering, takes place when a private firm sells securities for the first time, but pre-IPO speculation involves buying unregistered shares in a private company before it goes public. Pre-IPO transactions can range from risky deals to outright fraud.
“Someone claiming to have shares of Facebook or some other social networking company may very well be a paid promoter, or more likely, a con artist trying to take your hard-earned money,” the alert said.
A company can legally sell its unregistered shares in private transactions known as private placements, said FINRA. They are an essential source of capital for businesses, but the transactions carry significant risk.
If the company fails to complete its IPO, private investors may not be able to sell their shares. Liquidity is also affected by lock-up restrictions regulating sales of insider shares. Offerings can also be fraudulent. The company might not exist, or a promoter might offer shares he doesn’t have or that he acquired in a questionable way. The fraud could also involve false statements about the company and its prospects, including the likelihood, timing and pricing of any potential IPO.
FINRA urges investors to protect themselves from fraudsters:
• Always ask “Why me?” Why would a total stranger tell you about a really great investment opportunity?
• Be alert to persuasion. Virtually all pre-IPO scams dangle the prospect of exclusive access to eye-popping returns.
• Determine if you’re being conned by a convicted criminal. Check the Federal Bureau of Prisons Inmate Locator to determine if a solicitation is coming from someone who has served time in a federal prison. A number of states have similar locators. “A surprising number of investors are conned each year by career criminals,” FINRA said.
• Never send money in response to an unsolicited donation.