More On Legal & Compliancefrom The Advisor's Professional Library
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
Sales offers to pre-IPO shares of well-known social media companies, including Facebook, are scams that bilk the public by peddling non-existent securities of these companies, the Financial Industry Regulatory Authority (FINRA) said in a warning this month.
The scams seize upon investor demand for shares of the private stock of high-profile companies, FINRA said in an investor alert, “Pre-IPO Offerings — These Scammers Are Not Your Friends.”
FINRA noted that pre-IPO speculation involves buying unregistered shares in a private company before the initial public offering (IPO) of securities. While a company can indeed sell its unregistered shares in private placements, FINRA said, these investments can be fraught with risk and are typically open to a select group of investors who meet certain income or asset thresholds.
“While most pre-IPO offerings are legitimate, some are frauds in which con artists sell shares they do not actually have,” FINRA said in a news release. “Recently, FINRA became aware of potentially fraudulent schemes to sell purported shares of Facebook.”
In related news, the Securities and Exchange Commission (SEC) recently settled a civil action against a self-employed securities trader who allegedly bilked more than 50 U.S. and foreign investors out of more than $9.6 million in a series of pre-IPO scams involving purported shares of Google, Facebook and other well-known companies.
"Investors might think they are getting in on the ground floor of innovative social media companies, but instead find that they may have handed over real money for non-existent shares. Any investor who receives an unsolicited offer to invest in a pre-IPO company should walk away," said John Gannon, FINRA senior vice president for investor education.
The Pre-IPO Offerings alert advises investors to separate legitimate private placements from pre-IPO scams by:
- Avoiding any unsolicited pre-IPO offer. Investors should ask themselves, "Why would a total stranger tell me about a really great investment opportunity?"
- Being alert to persuasion tactics. Virtually all pre-IPO scams rely on the same recipe for a con: dangling the prospect of exclusive access to eye-popping returns at a discount if the customer acts quickly.
- Verifying whether the person touting the stock or investment is licensed. One way to track a con artist is to search for a person’s criminal record using the Federal Bureau of Prisons Inmate Locator.
- Using search engines to learn about a solicitation and those behind it, and getting an unbiased second opinion from a licensed investment professional or an attorney.
Read “Why Regulators Should Take a Closer Look at Risks of Private Placement Securities” at AdvisorOne.com.