Initial Public Offerings (IPOs) have a reputation for making investors rich, seemingly overnight. Sometimes, though, an individual investor is duped into investing in a company based on false, incomplete or misleading information in the prospectus. This could constitute IPO fraud and could lead to a lawsuit.
IPO prospectus filings
An IPO gives individual investors the chance to get in early to purchase shares of a newly-public business. Any IPO must be registered with the U.S. Securities and Exchange Commission (SEC). The registration statement provided to the SEC should include a prospectus.
The prospectus describes the details of the terms of the IPO, information about the company, including the company’s financial situation and other facts that potential investors need to know in order to make an informed decision on whether to buy into the IPO.
The SEC will review a prospectus to determine if there are any intentional falsehoods or illegal statements in it. However, a prospectus that has not yet had a complete SEC review may present a too-rosy picture of the company being made public, which could lead individual investors to rely on incomplete information to their detriment. This can ultimately be considered IPO fraud.
Even though the SEC will review the prospectus, the company itself is responsible for ensuring the registration statement is complete and accurate. Unfortunately, sometimes a company fails in this task and individual investors end up buying shares in the company that they otherwise would not have if they had been given a complete picture of the company’s financial goals and health.
If an individual investor is the victim of IPO fraud, they could be out thousands of dollars.
Red herring prospectuses
An incomplete prospectus is also referred to as a “red herring.” A red herring is a prospectus that does not contain key information on the offered shares. For example, the price of individual shares may not be disclosed or how many shares are being offered may not be disclosed.
Regarding a red herring prospectus, the registration statement provided to the SEC will contain a disclaimer that the information in the prospectus may be altered. Generally, this means that the shares in the company have not been put up for sale and any offers to purchase shares will not be allowed at this time.
Red herrings are legal, but they can transform into IPO fraud if the broker fails to uphold their fiduciary duty and an individual investor is encouraged to invest in something that is ultimately different than what they were told.
If you invested in a company based on false or misleading information, you may be able to pursue a lawsuit to recover what you lost. IPO fraud is a real problem that can cost people thousands in the long run, so it is important that you are given full and accurate information about the company you are investing in.