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Enforcement News: SEC Brings Enforcement Action Involving an Alleged $70 Million Pre-IPO Fraud Scheme

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  • Posted on: Feb 3 2025

By: Jeffrey M. Haber

Pre-IPO investing involves buying a stake in a company before the company makes its initial public offering of securities.[1] Many stock promoters invite potential investors to invest in a pre-IPO offering by providing an opportunity to make high returns in a start-up enterprise on the ground floor.[2]

While investing at the pre-IPO stage can be rewarding, it involves risk for investors, including the risk of complete loss – i.e., that the investor can lose his/her entire investment.[3] An early-stage company may never be successful, and the share price of the stock may never appreciate in value.[4] In addition, the company may never go public, a market for the company’s shares may never develop, and investors may be unable to resell their shares.[5]

From a regulatory perspective, pre-IPO offerings are not registered with the Securities and Exchange Commission (“SEC” or “Commission”). Unregistered securities offerings are prohibited under the federal securities laws unless an exemption from registration is available, and many potential registration exemptions do not permit companies relying on them to broadly offer their securities to the public.[6] As such, many pre-IPO offerings may be illegal.

The SEC has warned that “[f]raudsters may also use unregistered offerings to conduct investment scams.”[7] In doing so, the SEC has identified a number of common red flags that investors should look out for before investing in a pre-IPO security.[8]

  • Unregistered Investment Professionals: Many unscrupulous promoters of pre-IPO securities are unlicensed, unregistered persons.
  • Aggressive Sales Practices: The promoters of pre-IPO investment scams may set up “boiler rooms” and hire unregistered sales agents to solicit investors. These boiler rooms often purchase lists of investors’ contact information. An unregistered sales agent will typically start a relationship with an investor after “cold calling” them. The agent will often use a formulated script that includes answers and rebuttals to the investor’s anticipated questions. The agents may ask investors to cash out liquid investments in their 401(k) accounts and invest in pre-IPO funds. Sometimes they facilitate setting up new brokerage accounts for the investors.
  • Social Media Solicitations: Promoters of pre-IPO investment scams may use social media to solicit victims for pre-IPO investment scams.
  • Trending Topics: Promoters of pre-IPO investment scams may pitch the securities of companies claiming to focus on emerging technologies or industries — for example, crypto assets or artificial intelligence—to entice investors.
  • Imminence of Offering: Promoters of pre-IPO investment scams may make claims about the timing of the IPO—for example, they may say the IPO is “imminent” or will be conducted “this year.”
  • No UpFront Fees: Promoters of pre-IPO investment scams may tell investors that there are no upfront fees on pre-IPO offerings when they are actually charging exorbitant, undisclosed markups.
  • Limited Number of Shares: Promoters of pre-IPO investment scams may falsely claim to have a very limited amount of shares or to have shares at a lower price than the anticipated public offering price.
  • Investment Opportunities Specific to An Investor: Promoters of pre-IPO investment scams may tout that they have created investment opportunities for an investor (as opposed to just for the wealthy) and falsely claim that they will not make money until you make money. The promoter may also tell investors that there are no investment limits, net worth, or income requirements for investing.
  • Concealment of Promoter’s Background: Promoters of pre-IPO investment scams may try to hide the identity of involved individuals who have red flags in their backgrounds, such as disciplinary actions by a government regulator (including the SEC) or a self-regulatory organization (including FINRA).

[Eds. Note: the foregoing discussion, among other things, can be found at Investor.gov, Pre-IPO Investment Scams – Investor Alert (June 7, 2024) (here).]

Many of the foregoing red flags were identified in an enforcement action recently filed by the SEC in the United States District Court for the Eastern District of New York, titled: Securities and Exchange Commission v. Max Infinity Management LLC, et al., No. 1:25-cv-00549 (E.D.N.Y. filed Jan. 31, 2025) (here).

According to the SEC, from at least July 2021 to April 2023 (the “Relevant Period”), Defendants engaged in a scheme to defraud investors and prospective investors using boiler room-style high-pressure sales tactics, false and misleading statements, and other means of fraud and deceit to offer and sell investment fund interests purportedly representing shares of stock in private companies that had not yet held an initial public offering (“pre-IPO stock”). The investments were offered in the names of two related funds, Max Infinity Fund and Elder Fund. Through the conduct of each Defendant, which the SEC said violated the antifraud, securities registration, and broker-dealer registration provisions of the federal securities laws, Defendants raised over $70 million from more than 550 investors throughout the United States.

The SEC alleged that the scheme was orchestrated and controlled by the principals of Max Infinity Management LLC and related/affiliated entities (the “Max Principals”). Two of the Max Principals are veterans in the securities industry, each with a history of disciplinary proceedings. Both were suspended by the Financial Industry Regulatory Authority (“FINRA”) during a portion of the Relevant Period and now are permanently barred by FINRA. But, said the SEC, their control of the investment funds’ operations was largely hidden from investors, while the other Max Principal, who had virtually no experience in financial services, was held out publicly as the investment funds’ owner, organizer, adviser, and, at times, manager.

The SEC alleged that the Max Principals operated their fraudulent scheme through a variety of entities, including the Max Infinity Fund and Elder Fund (collectively, the “Funds” or the “Max and Elder Entities”) and two entities that operated boiler room type activities (the “Selling Entities”).

According to the SEC, the Max Principals hired and trained a workforce of unregistered sales agents, including the individual Selling Defendants, to cold call and pitch pre-IPO stock to thousands of prospective investors, many of them senior citizens, using canned scripts and rebuttals that contained false and misleading statements and deceptive devices, such as fake names, fabricated credentials and successes, and spoofed telephone numbers.

The SEC said that Defendants and the sales agents that they trained and managed routinely conveyed to prospective investors that the pre-IPO stock that was purportedly held in their funds would return quick profits of 200% or more, involved no upfront fees, entailed little to no risk, and would be shielded from market volatility. Defendants allegedly portrayed themselves as private equity experts working for a Commission-registered fund. Defendants and their sales agents also represented to investors that their funds had a track record of success in previously recommending pre-IPO stock, that the pre-IPO stock was “in house” at the funds, and that investors’ proceeds would be held in an escrow account until the pre-IPO company went public. The SEC alleged that “[n]one of this was true”.

In reality, alleged the SEC, the funds were not registered with the Commission, had no track record of success, and were organized, advised, and managed by individuals with no expertise in investment fund management. Moreover, the SEC alleged that the Funds did not hold investor proceeds in escrow, investments were not shielded from market volatility, and Defendants had no reasonable basis for representing to investors that they could expect substantial short-term profits with little or no risk. In many instances, said the SEC, Defendants sold investors shares of pre-IPO stock that were not “in house,” but instead the Max Principals had acquired an interest in an unaffiliated fund purporting to have pre-IPO stock but which also was not registered with the Commission.

Despite telling investors that there were no upfront fees or commissions, said the SEC, Defendants allegedly sold interests in pre-IPO stock at a price secretly marked up by 45% to over 100% above the price that the Max and Elder Entities paid to acquire the purported shares, securing immediate, substantial profits for themselves, while increasing the risk that investors would incur substantial losses. According to the SEC, Defendants used these undisclosed charges to pay sizable and undisclosed commissions to their sales agents, as well as to fund bank accounts held in the name of the relief defendants, from which monies were then withdrawn for personal expenses, including (in the case of some Defendants) to buy cars and jewelry and take expensive vacations.

To date, said the SEC, only one pre-IPO company at issue had gone public, and that event resulted in substantial financial losses for fund investors. Neither Defendants nor the offer and sale of Fund interests, alleged the SEC, were registered with the Commission or eligible for an exemption from registration during the Relevant Period.

As noted, the SEC filed its complaint in the United States District Court for the Eastern District of New York. The SEC charged Defendants with violating the antifraud, securities registration, and broker-dealer registration provisions of the federal securities laws. The Commission seeks permanent injunctive relief, the return of allegedly ill-gotten gains together with prejudgment interest, and civil penalties from all Defendants, and conduct-based injunctions and officer-and-director bars against certain individual defendants.

______________________________

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.


[1] Investor.gov, Pre-IPO Investment Scams – Investor Alert (June 7, 2024) (here).

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

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