An IPO fraud lawyer explains the definition of an IPO scam
What is an IPO scam?
When a company begins offering stock shares for sale to the public for the first time, an initial public offering (IPO) occurs. An IPO is generally underwritten by a major investment bank and there are myriad requirements associated with taking a company public.
Before an IPO however, a pre-IPO may occur. A pre-IPO makes shares of a company available to certain investors or makes a limited number of stock shares available on special pre-IPO trading platforms. Often, institutional investors like large private equity funds or hedge funds purchase shares of stock when a pre-IPO occurs. However, sometimes a pre-IPO is open to a broader group of private investors.
While pre-IPO trading can provide myriad opportunities for knowledgeable investors and can provide a company with an important opportunity to raise funds, pre-IPOs also provide ample opportunities for fraud and scams to occur. A pre-IPO scam can take many forms, but regardless of the specific type of fraud that occurs, misrepresentations or schemes in connection with the sale of securities can result in federal criminal charges.
At Bukh Law Firm, PLLC, our New York City securities fraud lawyers can provide legal representation in SEC civil actions as well as in criminal cases. If you are facing a tort lawsuit, legal actions by federal authorities or criminal prosecution, you need to be aggressive in finding the best approach to solving your legal problems. Give us a call and let us help you with your case.
What is a Pre-IPO Scam?
A pre-IPO scam involves fraud, misrepresentation, or intent to mislead in connection with the sales of stock shares for a company that has not yet had an initial public offering. There are many different ways that fraud could occur including:
- Shares of an IPO being sold without authority: A defendant may “sell” shares of stock he doesn’t own and does not have the authority to sell, embezzling client money for his own use. The Securities and Exchange Commission reports that a judgment order was entered against a defendant who had obtained more than $3.7 million by offering fake pre-IPO shares of major companies before the companies went public.
- Pre-IPO shares being sold for a company that does not exist or that never ends up going public. Investors may be offered the opportunity to buy shares of a company that is going public, but the company may not exist at all. The investors’ money is again embezzled with this type of pre-IPO investment scam.
- Unregistered securities may be sold. Companies that want to sell or offer securities have to either register with the SEC or fall into an exemption. The sale of unregistered securities is illegal, but it is a common type of pre-IPO investment scam.
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One large pre-IPO scam that resulted in a class action and allegations of IPO fraud occurred when Vonage went public. Voyage offered 13.5 percent of IPO shares to customers before the official IPO. The stock subsequently fell 30 percent in its first seven days of trading after the company went public.
A class action brought by investors claimed that Vonage offered the shares to customers because the company knew institutional investors would not buy the stock since Vonage had consistently lost money. The lawsuit alleged that Vonage violated a securities law requiring companies recommending the purchase of a security to have a “reasonable basis for believing the recommendation is suitable for the customer.”
What is IPO Fraud?
IPO investment scams are different than pre-IPO fraud because they involve schemes or attempts to mislead in connection with a company that is actually going public and making share available to the open market. IPO fraud scams may be perpetrated by big banks involved in underwriting initial public offerings or may be perpetrated by the companies going public. For example, companies and investment banks may mislead buyers about a company’s financial condition.
When a company goes public, many financial disclosures must be made. If the bank or company provide false or misleading information, this type of fraud can result in serious penalties for company executives who signed off on the false statements as well as for bulge-bracket banks (investment banks underwriting the IPO).
Is IPO Fraud a Crime?
IPO fraud can be a crime in cases where intentionally fraudulent statements are made in connection with the sale of securities. If the statements are made via postal mail, or via wire communication, a defendant may be charged with multiple federal offenses including:
- Securities fraud under 18 U.S. Code Section 1348.
- Mail fraud under 18 U.S. Code Section 1341.
- Wire fraud under 18 U.S. Code Section 1343.
IPO fraud can also result in criminal charges under state law, as well as SEC enforcement actions. You need to take accusations of involvement in a pre-IPO scam seriously and should consult with an consult with an attorney for help with your case.
How an IPO Fraud Lawyer Can Help You
An IPO fraud lawyer can help you to defend against criminal charges, as well as fight regulatory enforcement and civil actions.
Call Bukh Law Firm, PLLC today to speak with an experienced investment fraud lawyer who knows the ins-and-outs of pre-IPO fraud cases.