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Internet Scams Of the Week: Going Public

Some Internet marketing gurus are trying to defraud you by taking their online businesses public. Here’s how these type of Internet scams work. The gurus will roll up several different online businesses together. Because they’ve got large e-mail lists to mail to and cult followings, there’s a built-in market of prospective buyers. After all, if you bought Get Rich 2.0 from Ima Guru, you might also buy stock in Mr. Guru’s company as it goes public.

The scam is just a variation of what’s happened offline for years. In fact, that’s why there are securities laws requiring certain disclosures be made when offering stock for sale to the public. In the old days, you could have a family-owned home-based business sell unprofitable widgets at craft shows, give their company a “modern” big-sounding name, and sell stock to the public in the company without disclosing that the business wasn’t worth a bucket of warm spit.

As time went by, penny stock scam artists figured out that you could artificially inflate the stock of a public company without any real value, find some suckers to invest in it based upon lies and misrepresentations, sell shares at the inflated price to these suckers, and then walk away as the company imploded when reality set in. Just a couple years ago, a famous motivational speaker was up to his neck in launching one of these ventures. Even if the speaking guru didn’t know what was happening, suckers bought at 50 cents per share because of his name. But within a couple of years, the company traded as low as a penny per share, and last time I checked, public trading in the stock had been suspended.

Before the 2000 dot com bust, online companies did essentially the same thing except they disclosed in a prospectus to potential investors that they were burning cash like a Viagra addict in a brothel without any hope of making a profit. The message was: ‘buy our stock because we’re high-tech but understand we’ll probably go bankrupt because our business model is fundamentally flawed.’

The latest batch of Internet scam artists are priming their e-mail lists about all of the great things to come when an initial public offering (IPO) takes place. Their followers are supposed to rush out and buy the stock based upon the inflated earnings claims that gurus have made about their businesses a private companies. Here’s how it will work. Assuming they try to put legal lipstock on this pig, they’ll make available a prospectus that discloses in eye-straining legalese that the company going public is high risk and is unlikely to produce a positive return on investment. On the other hand, their pre-IPO (pre-launch) formula will be to sell the stock as a fantastic Internet biz opp. Not only will investors get rich, they’ll become co-owners of Ima Guru’s business as shareholders (the bonus carrot). This will be piked in pre-launch e-mails, teleseminars, webinars, and probably a few live seminars to boot. The same call centers used by guru to sell coaching programs and boot camps will be turned into pump-and-dump “boiler room” centers to sell you the stock by phone.

Understand this…if it sounds to good to be true, it probably is. Don’t become the victim of an Internet Bernard Madoff. Perform your due diligence before believing any of the representations made by an Internet marketer trying to take his company public…whether by himself or rolled up with his buddy gurus’ businesses too. Read the fine print in the prospectus, check out the guru’s background, the company’s audited financials, and consult with an unbiased experienced financial advisor before taking a leap of faith.

If someone tries to con you this way, tell your local consumer protection office about it. Even though you didn’t fall for the con, there might be someone else who will become a victim unless the government steps in to shut down the scam.

Mike Young, Esq.

Author Mike Young, Esq.

Mike Young has been practicing business and technology law since 1994 and is an angel investor in startups. He's been an entrepreneur since 1988. To get legal help from Attorney Young, click here now or call 214-546-4247 to schedule a phone consultation.

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