
A company with stellar performance and good corporate governance looking to expand will often approach external investors for funds. Making shares purchase available to the general public through Initial Public Offering (IPO) is access to unlimited funds for most startups.
Pre-Initial Public Offering (Pre-IPO) is when a firm makes its shares available to a specific set of investors before it goes live in the general market. These investors are usually founders, certain employees, early investors, private equity firms, hedge funds, and other institutions willing to buy large stakes in the firm.
Buyers in the pre-IPO placement purchase at a discount rate from the IPO price.
In preparation for an IPO, companies need to continue running. Pre-IPO is a way to raise enough funds for smooth operation until the IPO. Also, there is a possibility that the IPO does not perform as expected, thereby not raising enough money as planned.
Pre-IPO offering helps the company to secure a significant percentage of the money needed while it hopes the IPO supplies the rest.
Pre-IPO shares, even though discounted compared to the prospective IPO price, is not always a good investment. The Securities and Exchange Commission (SEC) describes it as a “Risky Business.”
IPO shares are registered with the SEC or required to meet an exemption under the federal securities laws—otherwise, the offering is not legal.
Pre-IPO shares, on the other hand, are unregistered — and they can be profitable, risky, or outright fraud.
Researching the people and companies promoting a pre-IPO before investing is important. Scammers are leveraging the reputation of the “hot” industry to defraud investors.
For instance, if they observe many FinTech companies launching IPOs, these scammers may create a company with no tangible asset and lure investors into purchasing pre-IPO shares, selling the hope of massive returns as observed in similar companies.
They may also claim to sell shares belonging to valuable companies at discounted prices.
To avoid being scammed, FINRA’s Investor Alert recommends these tips:
Have you received a pre-IPO solicitation and are unsure if to invest? Call us at (202)444-4222 to evaluate the offer.
If you have suffered financial losses from pre-IPO, do not hesitate to contact our office for a free consultation to identify possible ways to get you the best compensation you deserve.
Fill out the form or Call us at (202)444-4222