WASHINGTON — The Financial Industry Regulatory Authority (FINRA) has issued a warning about scams that purport to offer investors' access to pre-IPO shares of well-known social media companies, including Facebook. Seizing upon investor demand for shares of the private stock of high-profile companies, the con artists behind these scams are swindling the public by peddling non-existent shares of these companies.
As FINRA's Investor Alert Pre-IPO Offerings — These Scammers Are Not Your Friends explains, pre-IPO speculation involves buying unregistered shares in a private company before the initial public offering (IPO) of securities. While a company can sell its unregistered shares in private transactions (often called "private placements"), these investments can be fraught with risk and are typically open to a select group of investors who meet certain income or asset thresholds.
While most pre-IPO offerings are legitimate, some are frauds in which con artists sell shares they do not actually have. Recently, FINRA became aware of potentially fraudulent schemes to sell purported shares of Facebook. Additionally, the Securities and Exchange Commission recently settled a civil action against a self-employed securities trader who allegedly bilked more than 50 U.S. and foreign investors out of more than $9.6 million in a series of pre-IPO scams involving purported shares of Google, Facebook and other well-known companies.
"Investors might think they are getting in on the ground floor of innovative social media companies, but instead find that they may have handed over real money for non-existent shares. Any investor who receives an unsolicited offer to invest in a pre-IPO company should walk away," said John Gannon, FINRA Senior Vice President for Investor Education.
Pre-IPO Offerings helps investors separate legitimate private placements from pre-IPO scams by:
- avoiding any unsolicited pre-IPO offer – investors should ask themselves, "Why would a total stranger tell me about a really great investment opportunity?";
- being alert to persuasion tactics – virtually all pre-IPO scams rely on the same recipe for a con: dangling the prospect of exclusive access to eye-popping returns at a discount if you act quickly;
- verifying whether the person touting the stock or investment is licensed;
- determining if you're being conned by a convicted criminal by using the Federal Bureau of Prisons Inmate Locator;
- using search engines to learn as much as you can about a solicitation and those behind it; and
- getting an unbiased second opinion from a licensed investment professional or an attorney.
FINRA is asking investors who believe they have been defrauded — or treated unfairly by a securities professional or firm — to file a complaint.
FINRA is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit www.finra.org.