Initial public offerings of stock are often met with great excitement. IPOs offer investors an opportunity to buy shares of an up-and-coming company while they’re still fairly inexpensive, permitting the investors to make money and the company to raise funds. Investors may be excited to see the IPO for a particular company or believe that an IPO is a limited opportunity they should grab while it’s available. Investment structures that involve IPOs, such as SPACs, or are similar to IPOs, such as initial coin offerings, may also benefit from this kind of hype.
But partly because of that excitement, there are well-known fraud problems with IPOs, pre-IPO offerings, and other initial offerings. Companies and brokers may misrepresent the investment, including in SEC filings. ICOs and some aspects of SPACs are not well regulated, which can allow self-dealing and fraud to flourish.
Types of Offering Fraud
Some offering fraud happens before a company is public. Scammers may take advantage of the limited time frame of IPOs by offering “exclusive” opportunities to buy stock in a private company before it goes public.
Victims may later discover that:
The seller never had any stock in this company to sell
The company does not exist
The company has not gone public
At the actual IPO or ICO stage, fraud may happen at a more institutional level, when:
The company omits material information, or lies, in SEC filings and public statements
The investment bank involved in the IPO doesn’t perform due diligence, or actively misrepresents facts
Brokers (registered or otherwise) make material misrepresentations to induce sales
Finally, IPO fraud may be a key part of fraud involving SPACs, which are special purpose acquisition companies that exist mainly to purchase another company. The SPAC makes an IPO without having purchased any company or, usually, knowing what it will acquire. This setup requires investors to trust the judgment of the SPAC’s sponsors, who will choose what company to acquire (often but not always with shareholder approval).
SPACs can lead to fraud when:
SPAC sponsors misrepresent material facts about the SPAC
SPAC sponsors misrepresent material facts about the company being acquired
SPAC sponsors fail to adequately investigate the company being acquired
SPAC sponsors engage in self-dealing, involving either the company they choose to acquire or the distribution of profits after acquisition
Advocates for Investor Rights
If you’re a victim of investment fraud involving an offering, you’re not alone. Fighting offering fraud is a large part of the SEC’s work. But the SEC represents the people of the United States, not individual investors, and making fraud victims whole is not the agency’s top priority. To do that, you should consider a securities fraud lawsuit, including a class-action lawsuit if the circumstances warrant. People with evidence of offering fraud, regardless of whether they are victims, may also consider filing an SEC whistleblower claim that brings the scammers to justice while earning them a reward.
