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Before You Invest: Pre-IPO Stock Investments

Due to the media hype of the upcoming IPO of Facebook and other private companies, there is an increased interest in investing in these companies. Access to a private company’s stock prior to its IPO is very limited. Fraudsters are exploiting this limited supply and tremendous demand by offering “pre-IPO” shares of these companies, particularly Facebook, which is expected to go public at the end of May.

Investors are drawn to the prospect of buying pre-IPO shares at a lower price per share than the initial public offering price, with the expectation that they will be able to cash out at a higher price shortly after the IPO, when public demand drives up the price per share. Investors seeking to make a quick profit are likely targets for fraud.

Oftentimes, it is difficult to determine if a pre-IPO investment is a legitimate private placement or a fraudulent offering. Legitimate private placements may not be registered with state or federal securities regulators because they are exempted from registration due to certain restrictions on who can invest in the private offerings.

There are risks involved with the purchase of pre-IPO shares, even legitimate offerings. If the company decides not to go public, investors may be unable to sell their shares. Also, the pre-IPO shares may have been offered at an unreasonable price. There have been instances where an IPO price was much lower than what was predicted. At worst, the pre-IPO shares being offered could be outright scams, where the promoter offering the shares never owned any shares in the first place.

In a recent case, the Securities and Exchange Commission (“SEC”) filed a Complaint against two Florida residents and others, alleging that they defrauded investors across the country out of at least $12 million by offering pre-IPO shares of Facebook, Twitter, and Groupon, through their company Praetorian Global when, in fact, Praetorian never owned the pre-IPO shares.

Possible red flags to look for:

• Unsolicited offers – ask yourself why a stranger would be making you an exclusive offer.
• Anonymity – be especially careful when dealing with an entity or individual exclusively over the internet or by telephone, or when dealing with a company that you have never heard of.
• Requests to wire money or make checks payable to an individual – be very careful when asked to wire money, as these financial transactions can be very difficult to track. In addition, never make a check payable to an individual, as it could be deposited in a personal bank account.

Before making any investment, investors should:

• Research the individual(s) and companies offering the securities. State and federal securities regulators can verify licenses and provide background information, such as disciplinary history.
• Consult with an attorney or licensed securities professional about the potential investment.
• File a complaint with state or federal securities regulators if fraud is suspected.
• Always remember that if it sounds too good to be true, it usually is.

The Florida securities lawyers at McCabe Rabin, P.A. represent investors nationwide in FINRA arbitration matters. Investors nationwide who have incurred recoverable investment losses due to specific failures by stockbrokers and brokerage firms, and who may have a FINRA arbitration claim, may contact the Florida securities lawyers at McCabe Rabin, P.A. for a free and confidential consultation by calling toll free at 877.915.4040 or by e-mail to kelly@mccaberabin.com.