The Financial Industry Regulatory Authority (FINRA) recently issued a warning to investors about pre-IPO offerings. While the focus was on scams involving social media, overall, pre-IPO investing is risky. Many investors are constantly on the lookout for up-and-coming businesses that are sure to make a high profit. The idea of purchasing shares before the company goes public is enticing.
Pre-IPO deals have been the source of great returns for investors, but have also been tied to significant losses. The problem with pre-IPO offerings is that they are often fraudulent. For example, in 2010, a self-employed securities trader was accused of defrauding over $9.6 million from 50 U.S. and foreign investors in pre-IPO scams. This man is now facing criminal charges.
Pre-IPO Offerings Are Extremely Risky
Pre-IPO deals are risky for a variety of reasons, including:
Unregistered securities are involved. While a company may be permitted to sell unregistered shares in private transactions, known as private placements, these deals can pose problems for investors. If you change your mind about the investment or need to liquidate before the company goes public, you will be confronted with many challenges.
The company may never go public. There is no guarantee the company will complete an IPO. If that happens, you may not be able to sell your shares and get back your investment.
The offering may be illegal. Companies that want to offer securities must register with SEC or meet an exemption under the federal securities law. If a company doesn't register or meet an exemption, the offering is considered illegal.
The securities may be restricted. Many privately purchased securities come with restrictions, such as limitations on when you can sell your shares.