What to Do If a Broker Calls to Pitch an IPO

Selling shares of stock to the public through an initial public offering (IPO) is a tried and true way for a company to raise money by expanding its ownership base. Purchasing any securities product, including an IPO, carries risk. Before you invest, FINRA Investor Education encourages you to:

 

  • Be alert to warning signs that might signal a fraudulent sales pitch such as:
     
    • Guarantees of big profits with little or no risk

       
    • Claims that IPOs are always good investments

       
    • Promises that your broker is not receiving any compensation

       
    • Suggestions that you are getting inside (non-public) information

       
    • Pressure tactics to invest immediately

       
  • Request—and read—a preliminary prospectus. Also known as a "red herring," this document must be filed with the SEC. Pay particular attention to the risk factors section. Be wary if a broker tells you that you don’t need a copy of the prospectus to make a decision, or to ignore the prospectus or certain information in it.

     
  • Ask and get answers to any and all questions you might have about the investment, specifically:
     
    • Has the SEC declared the offering "effective," meaning that the company can complete its securities sales?

       
    • Always remember: this only means that the company has disclosed certain facts. This is not a seal of approval from the SEC.

       
    • Do you view the IPO as a short- or long-term investment?

       
    • Exactly what does the company do?

       
    • What is its operating history (profits, revenues, or history of losses) as a private entity?

       
    • What are the major risks facing the company?

       
  • Hang up if you feel you are not getting straight answers to your questions or are being pressured to act immediately or encouraged to invest an amount that is beyond your means.

     
  • If you decide to invest, read the final prospectus, paying particular attention to the changes made from the preliminary prospectus.

     
  • If you do decide to invest in an IPO, or are considering it, you should know:
    • You should not send your money to your broker (or the broker’s clearing agent) prior to the effective date, since the securities can’t be sold prior to that date.

       
    • Unless specifically stated in the prospectus, there is no minimum number or shares you must buy.

       
    • You do not have to agree to buy shares in the company after it begins trading publicly in order to buy shares of the IPO.

       
    • You have the right to request that your name be placed on a "do not call" list to avoid future phone calls.
       

Before conducting business with a brokerage firm or broker, take the time to check their professional background by using FINRA's online investor tool, FINRA BrokerCheck.

 

Don’t forget: if an investment sounds too good to be true—it probably is.