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"Pre-IPO" investing involves buying a stake in a company before the company
makes its initial public offering of securities. Many companies and stock
promoters entice investors by promising an opportunity to make high returns by
investing in a start-up enterprise at the ground floor level — often a new
company that claims to be related to the Internet or e-commerce.
But investing at the pre-IPO stage can involve significant risk for
investors. And pre-IPO offerings targeted at the general public — especially
those that are publicized through "spam" e-mails — are often fraudulent and
illegal. Consider the following:
- The Offering May Be Illegal – Any company that wants to offer or
sell securities to the public must either register the transaction with the
SEC or meet an exemption. Otherwise the offering is illegal, and you may lose
every penny you invest. The most common exemptions include those found in
Regulation D of the
Securities Act. But to meet these exemptions, the company and its promoters
generally cannot advertise the offering or make solicitations to the general
- You're Buying Unregistered Securities – That means you may have an
extremely difficult time selling your securities if you want to liquidate
before the company goes public. You may also have a difficult time obtaining
current, reliable information about the company. In addition, if you purchase
or acquire restricted
securities, you cannot sell those securities for at least one year—even if
the company goes public in the meantime.
- The Company May Never Go Public – In a growing number of cases,
fraudsters have focused on the predicted value and imminence of an alleged IPO
to lure—and pressure—investors. But don't be taken in by such false promises.
While some IPOs yield double- and even triple-digit returns, many others don't
or quickly fall back to levels far below the IPO price. In any event, the fact
remains that the company may never go public. And if that's the case, you may
never recoup your investment.
Before you even think about investing in any pre-IPO opportunity, be sure to
do your homework. At a minimum, you'll want to know:
- Details About the Offering – Is the securities offering subject to
an exemption? Remember, if it's neither registered nor exempt, it's illegal.
Check with your
state securities regulator to find out whether they have any information
about the company, the offering, and the people promoting the deal. You can
also check with the SEC's Public Reference
Room to see whether the company has filed an offering circular under
Regulation A or a Form D under Regulation D. If you ultimately decide to
invest, find out whether your stock will be restricted in any way. And be sure
to ask how, if at all, you can liquidate your investment if the company does
not go public.
- Information on the Company – What are its products and services?
Who are its customers? Does it have the physical plant, contracts, or
inventory it claims to have? Are audited financials available? If so, ask for
copies and review them carefully. We've seen over the years that the most
successful frauds typically start out with plausible lies. That's why you
should always independently verify claims about any company in which you plan
- Management's Background – Who runs the company? Have they made
money for investors in the past? Have any of them violated the law, including
any of the federal securities laws? Your
state securities regulator may be able to tell you whether the company and
the people who run it have previously defrauded investors.
- The Existence and Identity of the Underwriter – Has the company
retained an investment banking firm to underwrite the offering? If so, which
firm? 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 – How did you
find out about the offering? If you heard about it from a stranger or saw a
general advertisement, exercise extreme caution. Unscrupulous promoters
typically try to lure in as many unwitting investors as possible to maximize
their returns. Be sure to check out the disciplinary history of any promoters
state securities regulator.
As Matthew lesko says,
always check as many free government
programs and sources to determine if you are looking in the right direction..
Remember: the people and companies that promote fraudulent pre-IPO offerings
often use impressive-looking websites, bulletin board postings, and e-mail spam
to exploit investors who scour the Internet looking for e-businesses in which to
invest. To lure you in, they make unfounded comparisons between their company
and other established, successful Internet companies. But these and other claims
that sound so believable at first often turn out to be false or misleading
Always be skeptical when considering any offer you hear about through the
Internet. For tips on how to recognize and avoid Internet fraud, please read our
publication entitled Internet Fraud: How to Avoid Internet Investment Scams.