Facebook is getting ready for its IPO any day now. Some analysts predict that the eight-year-old company could be worth nearly $100 billion. If the actual numbers wind up being anywhere near that, some early-stage investors and Facebook executives will become very, very rich. You, on the other hand, probably won’t. If somebody offers you exclusive access to IPO or pre-IPO shares, chances are good that they’re peddling a scam.
All the excitement has been keeping the Securities and Exchange Commission busy. It’s been cracking down on a number of fraud operations over the past few months that have been using the buzz about Facebook’s IPO to con people out of their money. They operate in different ways, but all share a common thread: They take advantage of people’s desire to score a super-hot stock, hoping that the lure of a big payout will get starry-eyed investors to let their guard down.
In March, the SEC charged two investment fund managers with misleading investors and engaging in what the agency calls “improper self-dealing” — paying themselves commissions above what’s legally permitted and charging undisclosed fees to clients.
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In some cases, the criminals didn’t even have the promised access. “We’ve seen cases where fraudsters have told investors that they have special access to pre-IPO shares when in fact they’ve never owned them,” SEC spokesman Kevin Callahan says via email. Last month, the Commission busted a California man who was running a Ponzi scheme, getting victims to buy in by promising he could get them Facebook and other hot tech stocks.
Last November, the SEC broke up a similar ring, a fake hedge fund purportedly created to buy Facebook pre-IPO shares. In reality, the ringleaders just funneled money into their own personal accounts and paid off accomplices.
These kinds of scams are out there, but investors can protect themselves by being vigilant. The first red flag, unfortunately, is if you’re offered the chance to buy into Facebook’s IPO. “Unless you are one of the early stage investors or you worked there, it’s unlikely you’re going to be offered the chance,” says Gerri Walsh, head of investor education at FINRA, a financial regulatory body.
“Consider the source,” Walsh says. Especially if you’re approached by someone with an offer to buy Facebook IPO or pre-IPO shares, be very wary. Walsh says there are strict rules regulating who can and can’t trade stock in a company prior to its public offering.
Before getting involved in any kind of transaction, verify whether the person promoting the stock or option is licensed to sell securities, Walsh recommends. “A legitimate salesperson has to be registered with FINRA as a broker or with the SEC, or with their state regulator as an investment advisor,” she says.
Another red flag: If the person offering you the “access” wants you to write them a personal check as payment, Walsh says you’re probably dealing with a crook.
If you’re offered any kind of investment opportunity and you’re leery, tell the person offering you the deal that you want to run it by your financial advisor — even if you don’t have one, suggests Lynn Ballou, Bay Area ambassador for the Certified Financial Planner Board of Standards. If they’re trying to scam you, that will probably be the last you’ll hear from them.
“The most successful frauds typically begin with very plausible lies about exclusivity and needing to act fast, but it’s important for investors to slow down and conduct their own independent research about a stock offering before making the investment,” Callahan says.