FINRA today is warning investors to be on the lookout for scams offering investors an opportunity to buy pre-initial public offering shares of Facebook and other popular social media companies that many Wall Street investment banks will be taking public in the next year or two.
Gerri Walsh, vice president of investor education at FINRA, said the self-regulatory organization has received a number of complaints in recent weeks and months from investors who were contacted via unsolicited emails or watched YouTube videos offering bogus opportunities to buy into the white-hot social media sector.
While FINRA would not disclose how many complaints it has received, it was evidently enough for it to issue an advisory titled "Pre-IPO Offerings -- These Scammers Are Not Your Friends," essentially telling would-be investors that any offer to get in on the ground floor of Facebook before the stock hits the open market is almost assuredly too good to be true.
"We tell investors to always ask: 'Why me?'' Walsh said. "Why is this person contacting me? If you haven’t had any connection to the company before, you should be very, very skeptical."
While legitimate pre-IPO sales of unregistered securities do take place, most of the folks who get their hands on these shares have either provided significant cash infusions in the form of start-up capital before the company became a household name or have worked for the company for years and contributed tons of sweat equity to help build the company's business and brand.
Otherwise, any offer to buy pre-IPO shares of Facebook or any other company -- social media is particularly popular among con artists these days for obvious reasons -- is probably a scam and could result in tens of thousands or even millions of dollars in losses.
In September, the SEC entered a judgment order against one alleged scam artist, Randy M. Cho, for more than $8 million for swindling at least 45 investors in four states out of more than $3.7 million by offering pre-IPO shares of companies including Facebook, Google, AOL, Centerpoint and Rosetta Stone.
Walsh said the pre-IPO scam offers FINRA has identified have come from a number of nefarious sources.
"We look at every complaint about broker misconduct and investors contact us if they feel they've been mistreated by broker," she said. "But most of the fraud we see is from unlicensed individuals selling unregistered securities. That's why it's important for investors to check out if they people they're contacted by are licensed to sell securities in the U.S. and whether a security is registered with the SEC."
To help investors discern legitimate offers from potential fleecing, FINRA suggests potential victims should use the Internet and search engines to learn as much as they can about a particular solicitation to discern whether or not it's legitimate.
Also, FINRA advises investors to seek out a second opinion from a licensed investment professional or attorney before cutting any checks or serving up their banking or credit card information. It also suggest logging on to the Federal Bureau of Prisons Inmate Locator to determine whether or not your "hot stock tipster" is actual a guest of the government.
Anyone who thinks they've been scammed by a pre-IPO offer of this type or any other investment swindles is encouraged to file a complaint with FINRA.
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