Red Flags to Watch for in Pre-IPO Investment Scams
From the desk of Jim Eccleston at Eccleston Law
Investors considering pre-IPO investments should watch for common warning signs of fraud, according to the Securities and Exchange Commission (SEC).
According to Investor.gov, unlicensed and unregistered individuals commit much of the investment fraud in the United States. Before investing, including in pre-IPO shares, investors should verify whether the person offering the investment holds the appropriate registration or license. Investors can use the free tool available through Investor.gov to check.
Organizers of pre-IPO investment scams may operate so-called "boiler rooms" and hire unregistered sales agents to solicit investors. The operations often purchase lists containing investors' contact information, and sales agents "cold call" investors. Fraudsters also may use social media platforms and apps to solicit investors for pre-IPO scams.
Investor.gov reports that fraudulent pre-IPO promoters may use professional-looking websites, online postings, and email spam to attract potential investors. They may compare the promoted company to established and successful businesses without a valid basis. They may also claim that the company will soon complete an IPO, including by stating that an IPO remains "imminent" or will occur "this year."
Investors also should scrutinize claims that promoters have created pre-IPO opportunities specifically for them rather than only for wealthy investors. Fraudsters may falsely claim that they will not make money until the investor makes money.
Investor.gov reports that investors should remain cautious when an offering remains unregistered and imposes no investment limits or net worth or income requirements. Promoters may also claim that investors will pay no upfront fees while charging undisclosed and exorbitant markups.
According to Investor.gov, other warning signs include claims that only a limited number of shares remain available or that promoters offer shares below the anticipated public offering price. In some cases, fraudsters may not own the shares they offer and may use investor funds for personal purposes instead of purchasing shares.
According to Investor.gov, fraudsters may also conceal the identities of individuals involved in the offering, particularly when those individuals have disciplinary histories involving a government regulator, including the SEC, or a self-regulatory organization, including FINRA.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
Tags: eccleston, eccleston law, pre-ipo investments, securities fraud, investment scams, sec warnings, investor protection
