How To Avoid Scammers Pre Ipo Investment Traps

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Retail investors are being duped into paying for non-existent shares in companies slated for an upcoming initial public offering (IPO).
From Petrina Tan Tjin Yi
Malaysia’s stock market is buzzing with excitement. Following last year’s highly anticipated listing of 99 Speed Mart and the planned debut of MMC Port Holdings, set to be the largest since the listing of IHH Healthcare Bhd in 2012, the enthusiasm is palpable.
This forward trajectory is supported by compelling data: the number of initial public offerings (IPOs) surged to 55 in 2024 from 32 in 2023, while the amount raised in 2024 was RM7.42 billion, double that of 2023 (RM3.6 billion).
Yet, in the shadow of this red-hot market boom lies a growing risk for the investing public.
Sophisticated fraudsters are exploiting this very excitement through pre-IPO investment scams. As of July 2024, the Securities Commission Malaysia has already recorded multiple complaints from the public with reported losses exceeding RM800,000.
In the Malaysian context, these scams often take the form of fake private placements of shares.
The timing is strategic, coinciding with genuine upcoming IPOs published on the Bursa Malaysia website, which lends the fraud a veneer of legitimacy. They dangle the promise of high returns, luring retail investors into paying for non-existent shares.
Understanding the tactics and red flags are now essential for investors navigating this buoyant, but risky, market.
The scammer, acting as an “agent”, typically leverages high-pressure sales tactics. This is a modern iteration of the aggressive boiler room operations still prevalent in the US.
Scammers create public WhatsApp, Telegram, or other social media groups to promote these “investments” by reaching out to victims with the promise of guaranteed high returns through investing in promising companies at an early, “exclusive” stage.
The transaction then proceeds through a series of steps which share similarities with the modus operandi of other scams:
Phase 1: The trap is set
Victims are sold on the idea of exclusivity, high returns and fake testimonials. They are often told they are “specially selected” to participate in an offering typically reserved for large institutional investors.
Phase 2: The first bite
Victims are asked to pay for the “subscription” of non-existent IPO shares. Critically, these payments are requested to be made into the bank accounts of unrelated entities, often mule bank accounts.
Phase 3: The second bite
Scam victims are later contacted and asked to make further payments on the IPO listing day for the final allotment of shares.
Phase 4: The trap is sprung
At this point, the victim finds they are no longer able to contact the agent, the social media group is shut down, and the money paid for the non-existent shares is impossible to retrieve.
Certainly, the sense of exclusivity from a closed Facebook, WhatsApp, or Telegram group combined with a special offer of shares not supposedly open to the general public can be intoxicating.
However, investors must cut through the hype and arm themselves with knowledge to properly assess the authenticity of this investment opportunity.
Here are the three checks to perform before committing any funds:
1. Verify the purchaser – is this offer even possible?
The main selling point of such scams rests on its proximity and link to a genuine forthcoming IPO. Nevertheless, investors must consider the investing reality.
Pre-IPO shares are typically the remit of cornerstone investors, namely, large institutional funds, investment banks, or private equity firms which contribute to stimulating investor demand and stabilising IPO pricing.
They are not typically offered to retail investors via random social media groups or agents. If the opportunity seems too good to be true for a retail investor, it almost certainly is.
2. Check the regulator – is the seller licensed?
This is a critical official checkpoint. Before engaging with any individual or entity offering to promote, sell, or manage capital market products, verify their authorisation status with the regulator.
Use the SC’s Investment Checker tool at www.sc.com.my/investment-checker to confirm that the individual or entity is officially licensed to offer, promote, or sell any capital market products and services in Malaysia.
If the agent or platform is not listed, stop the transaction immediately.
3. Scrutinise the payment mode – where is the money going?
The mode of payment is the clearest sign of a scam. It is a red flag if an entity requests payment into personal bank accounts or those of unrelated entities which are usually mule accounts. The transfer of funds using cryptocurrency is yet another red flag to note.
As Malaysia continues on a forward trajectory in terms of IPO growth, it is imperative that retail investors are able to tap into this growth without exposing themselves to unnecessary risks and danger.
By understanding the nature of pre-IPO share offerings and arming themselves with knowledge and awareness, investors will be better equipped to avoid falling prey to scams. - FMT
Petrina Tan Tjin Yi is a senior lecturer at Universiti Malaya’s Faculty of Law and an FMT reader.
The views expressed are those of the writer and do not necessarily reflect those of MMKtT.

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