The warning signs
1. The call came out of nowhere.
Boiler rooms buy lead lists and cold-call. The Spaventa operation allegedly used more than 100 sales agents; StraightPath and Legend allegedly used more than 50 callers working from scripts. A Rule 506(b) offering can't be pitched to strangers through general solicitation.
2. "There are no upfront fees."
This line, or "we only make money when it IPOs," was allegedly false in the Prior 2 IPO, Keyport, and Spaventa cases. In StraightPath/Legend, the SEC alleges markups of roughly 19% to 105% on average were not disclosed. The fee was hidden in the price.
3. Nobody will tell you what the fund paid per share.
The markup is the difference between the fund's cost and your price. If the seller won't put the fund's cost basis in writing, assume the markup is large.
4. You're buying an LLC, not the company.
Most pre-IPO deals sold to individuals are interests in an SPV or fund. Some SPVs hold interests in other SPVs. Each layer adds fees and points of failure, as the Meyer Global case shows.
5. The salesperson isn't on BrokerCheck.
People paid commissions to sell securities generally must be registered. Unregistered sales forces were alleged in most of the cases we track.
6. The seller has a history, or a different name.
Keyport's LoPinto allegedly used an alias to hide prior SEC and FINRA sanctions. Prior 2 IPO participants allegedly concealed the role of a previously barred individual.
7. "It's almost sold out."
Urgency is a pressure tactic. The SEC alleges Linqto labeled offerings "sold out" or "fully subscribed" when more shares were available.
8. "SEC registered" or "SEC approved."
Private placements are not approved by the SEC. Keyport funds were allegedly falsely described as SEC-registered.
9. Guaranteed returns or a confirmed IPO date.
No one can guarantee when or whether a private company will go public, or at what price.
10. Odd payment instructions or pressure to sign a release.
Wires to an individual, an unrelated company, or overseas are a warning sign. So is being asked to sign a release to get your money back; Meyer Global investors were allegedly required to accept less than they were owed.
How to spot a pre-IPO scam in 60 seconds
- Is the seller on BrokerCheck, registered in my state, and with the firm on my documents?
- Do I have, in writing, the fund's cost per share and every fee?
- Can I see documents showing how the fund owns the shares?
- Did I find the fund's Form D on EDGAR, and are the people named in it clean?
If any answer is no, don't send money. Here's how to check each one.