Twitter is heading for its IPO sometime in the coming months, but there may be obstacles for the company as it seeks to get onto the public market. Reuters reported today that the social networking company has been hit with a $124 million lawsuit from two companies alleging that they were lured into a deal that would allow them to sell shares in the company.

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The firms, Precedo Capital Group Inc and Continental Advisors SA, say that they were approached by an approved buyer of Twitter sales to create a fund that would only hold shares in the social network. The shares would come from employees and others who hold shares in the micro-blogging site. They allege that Twitter never intended to go through with the deal and abused them in order to secure a higher IPO price.

Twitter stock lawsuit

The lawsuit asks that the social network pay out $24.2 million in compensatory damages and $100 million in punitive damages. The allegation is a serious one, and a legal battle may hurt the Twitter IPO if it becomes a serious case. Twitter did not respond to a Reuters request for comment on the lawsuit.

According to the companies, they were approached by GSV Asset Management and negotiated a deal to set up a fund that would hold shares in Twitter. GSV is an approved buyer of Twitter stock, and had agreed to purchase up to $278 million in shares from employees and other private holders, according to the suit.

Precedo and Continental said they had lined up money from investors for the first $50 million worth of shares in the company. The firms said that they held roadshows for the fund in Europe, Asia and the United States. Twitter put an end to the deal when it found that some investors were willing to pay $19 per share.

Twitter IPO

According to the companies, “Twitter’s intention was to induce Precedo Capital and Continental Advisors to create an artificial private market wherein Twitter could maintain that a private market existed at or about $19 per share for the Twitter stock.” They allege that the deal was a test of appetite rather than a real offering.

Twitter’s IPO planning has been cautious so far. The company has tried to avoid as many of the pitfalls that hit the Facebook Inc (NASDAQ:FB) offering as possible. If this lawsuit goes on, it may hurt the firm in the short to medium term.

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