Facebook's Pre-IPO Share Demand Exploited in Bogus-Stock Scams, Finra Says

Facebook Inc.’s privately held shares that are trading before an initial public offering may be attracting con artists who exploit investor demand by selling bogus stock, the main U.S. brokerage regulator said.

“While most pre-IPO offerings are legitimate, some are frauds in which con artists sell shares they do not actually have,” the Financial Industry Regulatory Authority said today in a statement. The watchdog learned of some “potentially fraudulent schemes to sell purported shares” of Palo Alto, California-based Facebook, it said, without elaborating.

Companies that haven’t yet held an IPO sometimes have shares, such as stock issued to employees, that trade privately. Facebook may let its workers sell as much as $1 billion of their holdings in an offering that would value the company at almost $60 billion, two people with knowledge of the matter said last month. Investors interested in private shares should be wary of unsolicited offers and take steps to ensure that sellers aren’t just pretending to hold stock, Finra said.

“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,” John Gannon, Finra’s senior vice president for investor education, said in the statement.

‘Next Big Thing’

Con artists touting pre-IPO shares for Internet-based companies such as Google Inc. and Twitter Inc. have distributed fraudulent e-mails and posted misleading investment videos on YouTube, Gerri Walsh, vice president of investor education for Finra, said in an interview. Anyone who becomes aware of such offers should contact Finra, Walsh said.

The scams are impossible to quantify and similar to those “10 or 15 years ago when the Internet was first starting to surge,” Walsh said. “We saw similar patterns of fraud using that ‘next big thing’ as the hook.”

To comply with U.S. laws, private placements typically aren’t advertised and may be limited to so-called accredited investors, such as people who meet minimum net-worth requirements. While the offerings help companies raise capital, the investments can be riskier than bets on publicly traded stocks and carry restrictions, such as lock-up periods on future sales, Finra said.

Investors flocked to the secondary market last year to seek growth. Exchanges such as SecondMarket Inc. and SharesPost Inc. gained popularity as investors poured funds into Facebook, Twitter and Groupon Inc.

To contact the reporter on this story: Justin Doom in New York at jdoom1@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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