NASAA Cautions Investors Against Unicorn Companies

The North American Securities Administrators Association (NASAA) is cautioning investors about the risks of pre-IPO investing in large privately held companies, commonly known as “unicorns.”

“Unicorns are not just the stuff of fairy tales; some financial unicorns exist today. But investing in unicorns is speculative, and generally is unavailable to retail investors,” NASAA states. “Retail investors looking to bet on a unicorn may be able to do so indirectly through a mutual fund, exchange-traded fund or business development company. But beware; investing in unicorns is risky.”

NASAA issued an investment advisory that outlines some of the risks of investing in pre-IPO shares.

“Investing in unicorns carries very real risks … particularly when investing directly into a unicorn,” NASAA states.

As privately held companies, there is no public market to trade the securities of unicorns. This means that the securities are illiquid. With unicorns, there is no guarantee shares can be resold after purchase, according to NASAA.

According to NASAA, weak internal controls and corporate governance infrastructure may lead to fraudulent practices by a unicorn. For example, NASAA explains, a company could create false sales and shipping documents to artificially increase sales numbers.

Another risk is disclosure. Since the securities of unicorns will not be registered at the state or federal level, investors may lack important information to make an investment decision, according to NASAA.