When a promising company is emerging or an industry sector becomes "hot," investors cannot resist the desire to get a piece of the action. Oftentimes these companies are privately held, and investors cannot buy shares because the company has not conducted an initial public offering (IPO). Still, the lack of a public market for popular companies does not stop zealous investors from doing anything it takes to get a pre-IPO allotment. Some of the recent issues of high profile social media and internet companies such as Facebook and Zynga had investors searching for access to their pre-IPOs through any available means. As a result, social media has also become the latest hook on which con artists can perpetrate a scam. In this scenario, fraudsters tout the way these companies have dramatically changed the way people interact, and that future prospects alone should make investors rich by simply owning pre-IPO shares.
Generally, securities offerings must either be registered with the Securities and Exchange Commission (SEC) or meet an exemption under the federal securities laws. Pre-IPO speculation consists of buying unregistered shares in a private company before the initial public offering of the securities, and it can range from risky deals to outright frauds. Investors bear the risk that the company may not exist, or if it does, the promoter might be offering shares he does not have or that he acquired in a questionable transaction. The fraud could also involve misrepresentations about the company, including the likelihood, timing, and pricing of a potential IPO.
The people and companies that promote fraudulent pre-IPO offerings often use impressive websites, bulletin board postings, and email spam to attract investors who scour the internet looking for e-business investments. To lure investors in, they make unfounded comparisons between their company and other established, successful internet companies. However, these and other claims that sound so believable at first turn out to be false or misleading.
Fraudsters would have investors believe that anyone can get in on a pre-IPO offering, no matter how big or small the deal is. Investors are recommended to ignore such bogus claims, no matter where they heard it from. However, if one cannot resist the temptation, it is important to do some homework. Never rely solely on information contained in a fax, email, text message, tweet, blog posts, or other format for social network communications. Investors can follow these steps to help safeguard their hard earned money:
-Details About the Offering: It is important to determine whether the offering is subject to an exemption. If it is neither registered nor exempt, it is illegal. Check with the state securities regulator and the SEC to find out whether they have any information about the company and whether the company has filed an offering circular. Ask if the stock will be restricted in any way and whether it can be liquidated in case the company does not go public.
-Information on the Company: Investors should independently verify claims made by the company. Information such as the company's products, services, customers, physical location, inventory, and financial statements should be inquired into before making an investment decision.
-Management's Background: Check with the state securities regulator about who runs the company, whether they have made money for investors in the past, and whether they have violated the law.
-The Existence and Identity if the Underwriter: It is important to verify whether the company has hired an investment banking firm to underwrite the offering. Contact your state securities regulator to find out whether the firm has a history of complaints or fraud.
-The Identity and Disciplinary History of the Promoter: Deceitful promoters typically try to lure in as many unwitting investors as possible to maximize their returns. Check the disciplinary history of any promoters with your state securities regulators.
Have you suffered losses on shares purchased before any company's initial public offering (IPO)? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.