Companies can’t hype IPOs before they happen. Neither can the underwriters.
Then there is Felix Investments, a small New York investment firm.
You’ve probably never heard of Felix, but it has carved out quite a name for itself in the burgeoning market for private shares in companies likely to go public.
In a nutshell, the four-year old firm says it buys shares from ex-employees in pre-IPO private companies like Facebook, Twitter and Groupon . Then it packages them into private investment funds. The idea is to cash out when there is a “liquidity event”—either an IPO or sale.
The very nature of pre-IPO transactions is curious, but It’s the aggressive nature of its emails to prospective clients that Felix and its partner, Frank Mazzola, promote those funds that caught my attention.
For more than a year, in emails sent to anywhere from 10 to 100 people, according to the company, Felix actively promotes, sometimes with a sense of urgency.
Never mind that financials for these private companies like Facebook and Twitter haven’t been filed or that Mazzola says the emails only go to people it believes are “accredited” and “qualified.”
It’s the over-the-top promotion of private companies that makes Felix seem more like a penny stock boiler room than a respectable broker dealer.
“That’s your opinion,” Mazzola told me today when I suggested as much to him.” Our customers are accustomed to the way we communicate with them. We don't cuff anything. We're very opinionated.”
Maybe, but here are snippets from some of the emails:
On January 21: “We have Facebook stock at $34 which implies a market cap of about $74 billion. They will file on Tuesday "we believe" and price the IPO in May in the mid $50's and we believe the stock will be north of $100 when we can sell in November. If we are wrong here and are disappointed with the transaction it will be because we only doubled our money - which would be a major disappointment but a highly unlikely one in my opinion! Let me know if you have an interest. We had $10 million and have about $2 million left."
“You need to let me know ASAP as because the stock is going very quick—I actually braved the snow and came into the office just to wrap this up.”
And in December 2010: “We are closing this week on our Twitter fund (Pipio Associates). This stock is series C and it is priced at $22 per share which is an implied valuation of $4.1 billion. That is just $200 million more than the value Kleiner Perkins just put their $150 million in. Or next close after this will be $26 per share. If you do not own stock in Twitter already it is a must. If you already own Twitter you need to add to your position.”
Several securities attorneys we talked to said they believed Felix's aggressive nature of the promotion pre-IPO is, at best, in a gray area of the securities laws.
“They are promoting the offering, they're talking about the possibility that the stock could take a big leap after the public offering and we can get you in on the ground floor. So these are all the classic hallmarks of solicitation under the securities laws,” says Adam Pritchard, a securities law professor at University of Michigan Law School.
“Whether we’re operating in a gray area or not, I think that’s for the regulators to determine,” Mazzola says.
And they very well may. In September, according to FINRA’s website, Mazzola was served with a Wells Notice by the SEC, saying that FINRA’s staff intends to recommend administrative action alleging violations of provisions for certain sales activity in 2010.
A Wells Notice is a letter from the SEC giving people or firms an opportunity to explain why it shouldn’t bring enforcement action.
“When FINRA and the SEC ask questions, you have to answer them,” Mazzola says. “And it is a whole process. And that process is still open. And so I really can't go into it.”
I reminded him that a Wells Notice suggests something may be coming down the pike from regulators fairly soon.
To which Mazzola said, “Again, it's open, so I'm not gonna talk about it.”
The SEC declined comment.
My take: Case not closed.
Questions? Comments? Write to HerbOnTheStreet@cnbc.com