Did You Incur Losses on Your Pre IPO Investments? You Might Be Able to Make a Compensation Claim

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.

What is Pre-IPO?

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.

Why Companies Offer Pre-IPO

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.

Is It Safe to Invest in Pre-IPO?

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:

  • Consider the source: If the details about the pre-IPO are from an unknown source, without a tangible and variable explanation for how they got your phone number or email, it is likely a bait.
  • Interview the promoter: Ask questions. There should be a reason why a total stranger will go all the length to send you an amazing offer. There are lots of people out there who will want to jump on it if it is legit.
  • Be alert to persuasion: Most pre-IPO scams promise more than realistic returns. Not only that, the con artists will persuade you to invest instantly without giving you enough time to consider the offer.
  • Verify the authenticity of the broker: Legit brokerage firms and brokers are registered with the Financial Industry Regulatory Authority (FINRA), the SEC, or a state securities regulator—depending on the type of business they conduct.
  • Do a background security check on the salesperson: Check the Federal Bureau of Prisons Inmate Locator to determine if a solicitation is coming from someone who has served time in a federal prison.
  • Never send money to an individual or firm that you are hearing from based on an unsolicited communication. Even if you have met or spoken directly with someone selling an investment, never write a check out to the individual. Your money is apt to end up in a personal bank account, never to be seen by the investor.
  • Get an unbiased second opinion. The only way to verify whether a particular pre-IPO opportunity is legitimate is to conduct in-depth due diligence. To fully understand the terms of the deal and any restrictions that apply, you will likely need to enlist the aid of professionals who are in no way connected to the deal, including an attorney who is skilled in both securities law and contract law or a licensed investment professional.

Contact S.A. Law Group for Free Consultation

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.

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