Pre-listed shares – Experience

Pre-listed shares – Experience with pre-IPO shares: What should I bear in mind? Pre-market shares, also called IPO shares or pre-listed shares, are securities that are not yet traded on the stock exchange. The abbreviation “IPO” for pre-IPO shares stands for “Initial Public Offering”.

Companies that have planned an IPO offer the purchase of company shares before the actual IPO as so-called pre-IPO shares. The aim of the IPO is to raise capital for the company.

Topics in our legal advice

Pre-listed shares: Have you had any experiences in connection with dubious offers of pre-IPO shares? You may be entitled to damages or repayment of your investment. The lawyers of the Herfurtner law firm can help you enforce your claims.

Table of contents

1. Pre-listed shares – experiences
2. Legal aspects of pre-IPO shares
3. Pre-listed shares: Recognising risks
4. Recommendations for investors
5. Lawyer for pre-IPO shares

Pre-listed shares experience

IPO shares are generally offered in the so-called private placement in two ways:

• Companies acting as intermediaries offer the pre-IPO shares of the IPO aspirant.
• The company that has planned the IPO offers the pre-IPO shares directly.

Often the most convincing argument for investors to invest in the purchase of IPO shares is, of course, the purchase price at which the shares are offered per unit. This is, according to the idea, considerably lower than the value that the share will reach due to the planned IPO and in the subsequent period.

The ideal of every investor is to earn high profits through price increases and dividends by buying pre-IPO shares. Yet trading in this area, which boomed even more at the end of the 1990s than it does today, is a risky form of investment.

For while you as an investor can more or less estimate how a share will perform if it is already traded on the stock exchange on the basis of past developments, with IPO shares you cannot so easily predict whether the share will hit or flop on the stock exchange.

Another inherent risk in trading IPO shares is the failure of the IPO. Since there is no market for the pre-IPO shares bought by the investors, reselling these securities is difficult and possible only with high losses.

In principle, therefore, only experienced investors should invest in pre-IPO shares.

Pre-market shares – lawyers can help

Dubious business practices

Pre-listed shares: However, it is not uncommon for the enormous yield opportunities of pre-IPO shares to bring dubious protagonists onto the trading floor.

This usually involves investment fraud in three different constellations:

1. In many cases, dubious intermediaries offer investors non-existent IPO shares of a real company for sale:

Just one of the many examples of this is the case of a 25-year-old fraudster from Mönchengladbach, who cheated more than 30 investors in 2012 and thus obtained approx. 422,000 euros.

The man and other accomplices acquired a large number of potential investors by telephone and persuaded them to buy alleged IPO shares of the company Facebook by skilful conversation and sales tactics.

The defrauded investors paid the purchase price for these IPO shares into an account set up by the criminals especially for this purpose. The money was then withdrawn in cash by the perpetrators. At no time had the investors purchased any actually existing pre-IPO shares of the company Facebook.

2. Pre-listed shares: in other cases, pre-IPO shares are offered in relation to companies that either do not exist or do not exist in the form advertised by the offeror.

3. In some cases, however, dubious companies that actually exist offer IPO shares to investors for purchase.

In this case, the investors are usually also contacted by telephone by an employee of the company and made aware of the company’s business model. This is followed by further telephone calls in which the potential investors are offered IPO shares for sale, since a considerable increase in value is supposedly in prospect through the upcoming IPO and it is a risk-free investment opportunity.

pre-market shares: Investors are often kept in the dark about the fact that the company is already in difficulties due to over-indebtedness and insolvency and that the purpose of selling pre-IPO shares is to then use the money for personnel and consultancy costs or other luxury expenses.

As an example, reference can be made to the judgement of the LG Düsseldorf of 06.11.2007 – 10 O 3/07 (https://openjur.de/u/124207.html), which was preceded by criminal investigations against members of the board of directors and the supervisory board of such a dubious company. The Düsseldorf Regional Court ordered the responsible persons to pay damages under civil law.

Of course, this is often also a serious case of fraud and breach of trust and therefore liable to criminal prosecution. However, investors usually only discover the machinations of such dubious companies at a late stage and are then overwhelmed by the issue.

Pre-listed shares: How investors recognise risks

• First of all, a healthy distrust is certainly one of the most effective methods to protect oneself from investment risks in connection with IPO shares. If investors are offered the chance to buy a pre-IPO share, it is important to take a close look at both the intermediary and the stock market aspirant.
• If the provider of the IPO shares is located abroad, caution is advised. Global markets are not only conveniently accessible and digitalisation due to the internet facilitates access to offers of any kind. However, this carries the risk of difficulties in asserting claims for damages regardless of the language barrier that often exists.
• Warnings against dubious providers can also be found on the website of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin). Here, for example, there are also warnings against buying pre-traded shares from companies that do not offer a sales prospectus in advance, although they are obliged to do so under Article 3(1) of Regulation (EU) 2017/1129 (Regulation on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market).
• Investors should also obtain information on whether the provider of the IPO shares has been approved by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin). If the provider of the pre-IPO shares is not listed in BaFin’s directory, caution is advised.
• If investors receive so-called cold calls, i.e. unsolicited calls in which they are offered pre-IPO shares, an increased degree of caution is advisable. Such cold calls are usually illegal and indicate the dubiousness of the caller.

Difficulties with pre-IPO shares? Recommendations for action for investors

Pre-listed shares: Have you invested in IPO shares and now believe that you have been the victim of investment fraud? In this case, you should first and foremost refrain from further investments, even in case they are claimed by the trader. In addition, you should find out the reasons why a possible fraud occurred and what chances there are to recover the lost investment and confront your contact person or company with this.

If you do not receive satisfactory information from them, you can seek support and talk to a lawyer.

Pre-market shares: Law firm – support for affected clients

Clients who have invested their money in pre-IPO shares and are now facing problems can contact the lawyers of the law firm Herfurtner Rechtsanwaltsgesellschaft mbH and obtain non-binding information about their options regarding pre-IPO shares and compensation for damages. Advice is provided throughout Europe. Click here to go directly to our contact area.