Can Bond Offerings and IPOs Be Used for Securities Fraud?

When people think about securities fraud, they often think about a well-established company misrepresenting their financials or putting out inaccurate reports about their future. However, it’s not just stocks that can lead to fraud, and it’s not just long-established companies that engage in this behavior.

You also need to be aware that bonds and initial public offerings (IPOs) can come within securities fraud, but that there are ways of recovering your losses if you were a victim of a fraudulent offering.

What Are Bonds?

The two most dominant types of investment products are stocks and bonds. When you buy stock, you are buying an ownership interest in the company. You get paid based upon the success of the company and the stock price appreciating in value. A bond is a loan to a company that generally agrees to pay you a fixed rate of return over a period of time. You do not have the potential upside as you have when you own stock, but you have a greater security that your loan is going to be repaid over time.

For example, if you buy 100 shares of Apple stock, then you are now an owner of Apple. If the company does well, a stock may go to $110 a share, which means you have made 10% on your money. However, Apple might not always want to sell stock. They may want to raise money by selling a bond to you, and agree that if you lend up $100, they will pay you $105 in a year. The bond markets are quite large, even bigger than the stock market. Bond offerings are attractive to a company because it does not require the company to give up any further equity or ownership of the company.

Can Bonds Be Used for a Fraudulent Scheme?

Most companies have borrowed more money offering specific terms to repay the money to their lenders and frequently have collateral to repay these loans. Many investors are attracted to it because it provides a sense of security that they can count on a particular income stream. The reason why there is so much fraud is that people borrow money from others all the time, claiming that they will be able to repay the money, and then they cannot because the borrower misrepresented their ability to repay the loan or how they where going to use the money. In addition, when bonds fail, people are left to try and collect their money back from the companies that made these loans under false pretenses.

Can Fraud Occur During an Initial Public Offering?

There is a great deal of fraud that occurs in initial public offerings, because this is when a company is first disclosing significant inside information about themselves, with the goal of raising capital. They are incentivized to not disclose the risks and the problems with the company, and they try to put their best image forward. However, the federal securities laws require them to disclose not just rosy projections, but the good, the bad, and the ugly about the company. They must do this so an investor can make a reasonable, rational decision about whether or not they want to invest in the business.

Please reach out to our securities fraud lawyers at Silver Law Group if you were scammed out of investments with IPOs or bonds. These cases are frequently brought as a class action as multiple investors were harmed the same way and can be handled on a contingency fee basis.