PRE-IPO OFFERINGS – RISKY BUT POTENTIALLY PROFITABLE
A Pre-IPO is the term for investing in a company before the company launches its initial public offering in which it offers securities to the general public. Pre-IPOs are known for the strong returns possible because of the opportunity for ground-floor investment but investors should know the risks as well as the potential returns before considering an investment.
The risks of investing in a company at this early stage are significant and often these sort of offerings are targeted at investors through fraudulent methods. How to tell the difference between a potentially profitable pre-IPO investment and a scam is an absolute must for the investor in the Internet age.
Most offerings in the pre-IPO market place are real but there is a fair share of fraudulent opportunities out there ready to catch the unwary investor.
How to avoid getting caught out by fraudulent pre-IPO offers.
- If an offer to purchase these types of shares comes to you on an unsolicited basis it is generally best to avoid it.
- Be on your guard if the returns you are being offered sound unrealistic. This is a common sign of a potentially fraudulent offer.
- Only consider investing with regulated investment professionals. You may [check the status][companycheck.htm] of a company here.
- Use the Internet as a resource to research the company that you are being offered.
- Consider getting a third-party objective opinion before investing.
- If the company you are considering investing in is US-based then the transaction should be registered with the SEC.
Let’s assume that you have done your due-diligence and the offer is real. There are still many potential pitfalls facing the pre-IPO investor:
The purchase of unregistered securities comes with other risks including:
- Lack of information on the company due to minimal reporting requirements. These types of company do not have the same information available that a public company does.
- Low chance of selling the shares before the company eventually floats.
- Pre-IPO shares are generally restricted meaning that you will have to wait a year after the company flotation to sell the shares on the open market.
- Possibility of lack of liquidity that will prevent you from selling even once the company floats if it plans to trade on a micro-cap exchange.
- The chance that the company may never achieve their goal of becoming a public company. In this case the chances are that your funds will be lost.
In Conclusion – It’s not all doom and gloom.
All of that being said, the pre-IPO market has and can show some of the strongest returns available in any part of the financial markets but must be approached with caution and a certain appetite for risk.
If you have recently received an unsolicited offer to buy shares in Facebook, Google or any other private company please report Have you received any unsolicited offers for pre-IPO stock, either in Facebook or another privately-held company? Please report this to International Securities and Equities Commission.
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