The risks of investing in Facebook

Facebook’s initial public offering next week could value the company at as much as $96 billion US, as frenzied investors look to get a piece of the social media giant.

But Joshua Brown, VP of Investments at Fusion Analytics Investment Partners, tells BNN that investors being sold Facebook funds as a way to participate in the IPO should be cautious.

“We’ve seen these Facebook funds cobbled together by lower-tiered firms. What they’ve done is they’ve gone out and found employees on the fringes and convinced them to sell them shares early,” he says. “They’ll cobble together a fund made up of odds and ends of shares…and then they’ll put their sales force on the phone to go sell this thing as though it is actually the Facebook IPO.”

Brown says there a very important differences between actually getting shares in Facebook -- which he says will be the IPO of the decade -- and buying into a fund.

“It’s really important to understand that if you are being pitched a Facebook fund you are buying a private placement that may or may not have shares of Facebook, but it is not the same thing as a Facebook IPO,” he says. “We don’t really know how many shares are actually going to be in that fund. We don’t know if they have been successful in tracking down these shares or how many other investors are sharing in this fund and are essentially dividing those shares up.”

Buying into Facebook funds is more dangerous than chasing stock in the aftermarket, Brown says.

And he adds a word of caution for all retail investors.

“Sell-side analysts on Wall Street are really smart people, but what their role is supposed to be at the firm is much different than what most people think. Much of the calls they make are essentially based on marketing,” he says. “Anything that comes from a sell-side research department has to be looked at with an eye toward they’re probably doing banking with the company and they’re probably afraid of getting cut off from access so they will usually not be too negative.”