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Consumer Alert:

05/04/2012

Consumer Alert: Beware of Social Networking Stock Scams

 

 

Consumer Alert: Beware of Social Networking Stock Scams
~Pre-public stock is a high-risk investment~
 
TALLAHASSEE, Fla. (May 4, 2012) – As online social networking sites such as Facebook and Twitter become increasingly popular, there is heightened interest in investing in these private companies. However, access to a company’s stock is limited prior to its initial public offering (IPO). Con artists are capitalizing on this demand by offering “pre-IPO” investments, particularly for Facebook, which is expected to become a publicly traded company in late May 2012. The Florida Office of Financial Regulation (OFR) has noticed an increase in calls and complaints regarding pre-IPO shares of companies and urges all consumers to be wary of the high-risks of such investments and of possible fraudulent investment scams.
 
The lure of a pre-IPO investment is access to an exclusive deal. Investors are tempted with the opportunity to buy shares in a private company at a lower price per share than the IPO. The expectation is that they then will be able to cash out when the stock becomes available to the public and demand drives up the price per share, making an instant profit. As a result, investors seeking to “buy low, sell high” and make a quick profit are likely targets for fraud.
 
Unfortunately, it’s often difficult to differentiate between legitimate pre-IPO investments (“private placements”) and fraudulent offerings. Even legitimate pre-IPO offerings might not be registered with state or federal securities regulators because the offerings qualify for a registration exemption, such as restricting the offering to investors meeting certain income or net worth requirements.
 
There are other risks associated with purchasing pre-IPOs. If the stock never goes public, investors may not be able to sell the stock. The pre-IPO shares may have also been offered at an unreasonable price. At worst, the pre-IPO shares being offered could be outright scams where the stock may not exist in the first place.
 
Fraudulent pre-IPO offerings have many of the same red flags as any investment fraud. While the details may vary, the tactics are the same. Scammers are experts at staying current on trends and tailoring their pitches using:
 
• Unsolicited pitches: Ask yourself, “Why would a stranger offer me an exclusive deal?”
• Anonymity: Be careful when dealing with people over the Internet or when wiring money as these business transactions are very difficult to track.
• Persuasion: One method is name dropping of legitimate businesses. For example, “I have access to X shares of Facebook stock through a bundled deal with X securities company.” Hearing the familiar name may give you a false sense of security about the investment opportunity.
 
Investors can help protect their hard-earned money by:
 
• Documenting all communications with the promoter. Additionally, never write a check to an individual as this money could be deposited in a personal bank account.
• Researching whether the promoter and other individuals are registered with a state or federal securities regulator. OFR can verify a license as well as provide background information, including disciplinary history.
• Seeking a second opinion with an attorney or licensed securities professional.
• Filing a complaint if you suspect fraud. Consumers can file a complaint online or call OFR at (850) Its-Your Money (850-487-9687).
 
For more information, contact the OFR Press Office:
 
Amy Alexander 
(850) 410-9789
Katie Norris
(850) 410-9826
Katie.Norris@flofr.com