Regulators Warn About Facebook Pre-IPO Scams

March 16, 2011

Securities industry regulators warned investors to steer clear of criminals selling bogus pre-IPO stock in Facebook and other popular social-media companies.

Securities industry regulators warned investors to steer clear of criminals selling bogus stock in Facebook Inc. ahead of its initial public offering.

The Financial Industry Regulatory Authority, the self-policing organization that oversees Wall Street, said Tuesday that scams that purport to offer investors access to pre-IPO shares of well-known social media companies, including Facebook, Twitter and LinkedIn, have been reported. FINRA offers these tips for helping to spot a pre-IPO scam.

“While most pre-IPO offerings are legitimate, some are frauds in which con artists sell shares they do not actually have,” FINRA said in a statement. “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.”

Pre-IPO speculation involves buying unregistered shares in a private company before the public sale of securities. Private companies can sell their unregistered shares privately, known as “private placements,” but FINRA noted that “these investments can be fraught with risk and are typically open to a select group of investors who meet certain income or asset thresholds.”

"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, said in a statement.

If you believe you may have fallen victim to this type of scam, you may file a complaint with FINRA.