• English
  • 简体中文
  • 繁體中文
  • Tiếng Việt
  • ไทย
  • Indonesia
Subscribe

What Is Pre IPO Investing?

Charlie Brooks

Oct 28, 2022 16:18

24.png


Pre-IPO is appealing because it permits investors to purchase company shares at a steep discount before the stock is listed on the stock exchange. Selling the stock at a discount makes sense since it enables the management to deal with any financial uncertainty leading up to the first public offering and the first trading days.


Pre-IPO shares represent a fantastic opportunity for investors to realize enormous financial advantages if the price increases. You should be aware. However, pre-IPO stocks are frequently restricted to high-net-worth individuals since the company's management wishes to sell large blocks of investing.

What Is Pre-IPO Investing?

Initial public offerings, or IPOs, are typically conducted by companies seeking to transition from private to public entities. Pre-IPO investing occurs when a company sells private stock to raise funds before its initial public offering. Companies may sell these shares to hedge funds, private equity firms, and rich investors.


Pre-IPO shares, unlike initial public offerings, are offered privately to a select group of investors rather than on public stock markets. Pre-IPO shares and stocks are more difficult for individual investors to acquire due to their exclusivity. Retail investors may require the assistance of a private brokerage firm or financial advisor in order to gain access to these shares.


22.png


The Securities and Exchange Commission (SEC) mandates a six-month lock-in period for purchases made prior to the initial public offering (IPO). The lock-in period was enacted to prohibit investors from quickly selling their newly-purchased company shares, shielding the shares from the tremendous volatility and pressure of the public market.

Why Is Pre-IPO Investing Important?

Due to companies remaining private for lengthier durations during the 2010s, the Pre-IPO investment market experienced a boom in popularity (as compared to previous decades). This fad generated two problems:

1. Longer than anticipated, shareholders were rendered illiquid. 

Early employees seeking liquidity with their appreciating, highly valued shares did not have a market to sell them. Early investors, such as angel investors and earlier-stage VC firms, found it challenging to seek liquidity, whether to realize a profit from strong private market development or to free up liquidity for further early-stage investments.

2. There was no marketplace through which accredited investors could access exciting, quickly developing private enterprises.

These pain points were the impetus for the development of the private secondary market, which enabled shareholders to increase liquidity by selling their shares to other investors. The growth of this market allowed access to some of the most sought-after multibillion-dollar private enterprises to a much broader pool of investors (both institutional and individual).

Why Do Companies Sell Pre-IPO Stock?

Before becoming public, many private companies issue pre-IPO shares to investors for two primary reasons.

Raising Funds

Pre-IPO placements permit a company to raise capital prior to its first public offering. A company's share price that has gone public can be affected by various variables. The IPO might not live up to expectations. If investors do not purchase the shares, the company may be unable to raise the necessary capital.


23.png


Pre-IPO shares, however, are not susceptible to market-related volatility. The company can sell huge blocks of shares at a predetermined price and raise a known amount of capital.

Getting Guidance from Investors

The majority of pre-IPO shares are acquired by huge investment firms, hedge funds, and other institutional investors with unmatched resources, knowledge, and experience. They can provide guidance to the firm's management, assist them in making the best decisions, and facilitate the transition from a private to a publicly traded company.


Especially for startups, these investors' guidance and insights can be priceless.

Why Does Investing in A Startup Pre-IPO Make Sense?

Large private equity firms and astute investors seize the opportunity to invest in a business before its first public offering due to the following advantages.

Exponential ROI

As soon as the company goes public, investors can sell their shares for a considerably higher price. Within four to five years, venture capitalists should expect a modest 10x return on investment.


In addition, these investors continue to receive dividends over time, allowing them to generate passive income. Most investors might reasonably anticipate a modest ROI growth of greater than 15x.

Avoid stock volatility

Events such as the COVID-19 pandemic can substantially influence the economy, causing the share prices of publicly traded corporations to drop precipitously.


Due to the fact that shares have not yet been made public, pre-IPO investments are less likely to be affected by social events that cause stock market fluctuations.


For instance, while the stock market witnessed a broad decline as a result of the coronavirus pandemic, tech businesses such as Netflix and Amazon continued to grow significantly.


Even if IT titans such as Apple and Facebook sustained losses in the first quarter of 2020, their losses still exceed the negative median of 12.20% for the S&P 500.


This is still excellent news for investors, and this is due to the fact that even if they experienced portfolio losses, it would not take them long to recover.


However, if you bought into these firms prior to their initial public offering, you have already received a significant return. In effect, the losses you incurred as a result of the COVID-19 epidemic on your investment were applied to your earnings, not your initial investment amount.

Shorter holding times

The shorter holding term is a further advantage of pre-IPO investing investments.


If you invest in a startup before its initial public offering, you are only obligated to keep your shares for three to two years.


Those who opt to wait until the startup's secondary offering before investing would be required to wait longer.


They must wait until the startup goes public before investing. It may take up to ten years for this to occur. Then, you must await the IT startup's announcement of its secondary offering, and they would be unable to invest till then.


By the time this occurs, share prices will already have increased. So, although individuals who invested in the tech startup before its initial public offering are already reaping profits, you're just getting started.


While a larger ROI can be anticipated from long-term investments in the pre-IPO context, it has been demonstrated that certain digital companies, such as Zoom and Pinterest, were able to provide positive returns in the brief period between the last round of private funding and the IPO announcement.

Where Can I Find Pre-IPO Opportunities?

You can purchase pre-IPO stock through specialized brokers and financial consultants. These companies acquire stocks and resell them to potential buyers or work with other companies seeking investors.


If you are interested in purchasing significant quantities of stocks, you can obtain a list of accredited purchasers from the NASDAQ private market or personally approach a company. Similarly, there are businesses that give additional possibilities to individuals prepared to invest $100,000 or more. Some reputable brokers provide access to the American and European markets for smaller investors.


You can also indirectly participate by investing in an ETF or venture capital firm that invests in pre-IPO companies.

How Do We Make Pre-IPO Investing?

One reason ordinary investors do not purchase pre-IPO stocks is that they are unaware of them. Private sales are restricted to wealthy individuals or are restricted to institutional investors.

Do Market Research

Networking is a potent investing instrument that has the potential to provide high returns. Connecting with the proper people who understand how to invest in pre-IPO stocks is a game-changer, but locating them can be difficult. Getting in touch with banks, financial firms, and accounting firms is one technique to track them down.


If they are unaware of any stocks in the pre-IPO phase, they may be able to put investors in contact with the appropriate individuals. Investors may also attend company presentations or pitch events for startups. To identify the appropriate investments at the appropriate time, individuals from the IPO business must be surrounded by individuals.


Crowdfunding sites send out emails informing subscribers of funding-seeking businesses. Ensure that you subscribe to these newsletters.


Several pre-IPO platforms have altered the playing field by facilitating the participation of retail investors.

Regulated Pre-IPO Brokers

EquityZen is an example of a regulated broker that has created a platform for accredited investors to be invited to early-stage investment rounds. Several systems, such as EquityZen, offer a marketplace for investors and shareholders. However, investors must be vigilant and verify that they purchase stocks from a regulated broker.


Investors should conduct background checks on pre-IPO brokers by perusing client testimonials to determine the experience of clients. The number of organizations and overall volume of transactions offered by a platform would also be a crucial elements to evaluate. A significant number of closed investments provides investors with an idea of how many clients have utilized the site.

Buy Directly from Companies

Purchasing shares must be performed through a regulated broker prior to or during an IPO. However, investors may have access to inexpensive stocks if they become angel investors or venture capitalists with the company.


Both choices involve becoming a shareholder, but angel investors may also have a say in how a business is run. Being a participant in the early-round investment gives the investor a significant advantage over the rest of the market, and if the business is successful, the investor's cash could appreciate significantly.

Pre-IPO Investing Risks

Prior to making an investment choice, you must examine the risks associated with the pre-IPO stock, just as with any other investment.

The danger of low returns

There is no assurance that the stock will perform well, which is the main risk connected with investing in pre-IPO securities. If the initial public offering (IPO) fails and there is no demand for the company's stock, you may not receive the expected rewards. If the company you've invested in performs poorly, its stock value may decline significantly. It is possible that you will lose most or all of your investment.

The Firm Might Not Become Public

When you invest in a company before its initial public offering, you anticipate that it will go public soon, and you do not know whether or not it will be made public. There are numerous reasons why IPOs can be delayed, paused, or canceled at the last minute.

Insufficiency of Financial Information

One of the disadvantages of investing in a company prior to its initial public offering is that you may not have access to all the information necessary to make an informed choice. Publicly traded corporations are obligated by law to disclose their financial information to the general public, and private enterprises have no such requirements. This generates an information asymmetry in which the individuals selling the shares (the company management) have complete knowledge of the company and its financial status, while the people buying the shares (the investors) do not. This is something to bear in mind while investing in the pre-IPO stock.

Pre IPO Investing Platforms

Online crowdfunding platforms may make investing in private enterprises more accessible for those with limited financial resources. The following are some popular pre-IPO investment platforms:

MarketX

MarketX is an investing platform that connects investors with pre-IPO and growth-stage investment possibilities. It has reduced procedures for analyzing and exiting from these opportunities.


MarketX also provides group purchasing, which enables investors to pool their resources and acquire access to deals they may not have otherwise been able to obtain. In addition to the United States, MarketX offers deals in China, Singapore, Indonesia, India, and the United Arab Emirates, among other places.

StartEngine

StartEngine is a U.S.-based equity crowdfunding platform that allows businesses to raise cash through Regulation Crowdfunding and Regulation A+. The platform has aided over 500 startups in raising over $600 million to date.


Access to liquidity for investors (through the StartEngine Secondary marketplace), a diverse selection of investment options, and up to 20% bonus shares for early investors are among the advantages of utilizing StartEngine.


Boxable, Jet Token Inc., Trade Algo, and GoSun Inc. are among the businesses now listed on the site. Investment minimums vary for every project.

Raison

The app's usage of blockchain technology makes Raison distinctive. This means that non-accredited investors can invest in some of the world's hottest firms.


And you may invest with fractional shares, so you don't have to spend a fortune to get started. Raison enables anyone to invest in late-stage startup deals for as little as 0.1 shares.


On the Raison app, you may currently locate businesses such as Klarna, Patreon, Neuralink, and Scale AI. Airbnb and Robinhood are two of the most recognizable startups that have previously been listed on the marketplace.

Linqto

Linqto is a platform for private investment that gives authorized investors access to shares of private enterprises. The minimum investment is $10,000, and there are no recurring costs. Ripple, Uphold, Bloomreach, BitPay, and Tradeshift are presently available as investments.

EquityZen

EquityZen is a marketplace that enables investors to buy and sell shares of private firms. You must first join the community to invest in a private company using the EquityZen platform. Once you become a member, you will be able to examine all of the available firms for investment.


Then, you can determine the amount you wish to invest in each company. EquityZen offers a $10,000 minimum investment requirement, although this can be reduced if you invest in five or more projects.


Chime, SpaceX, ByteDance (the parent company of TikTok), Uniswap, and many others are among the companies now accessible for investment on EquityZen. You will be able to watch the company's progress and cash out your investment when it goes public or is bought once you have placed your investment.

Forge

Forge provides investors with access to top private growing firms. Boxabl, Scale AI, Miso Robotics, The Boring Company, and other businesses are currently open for investment.


When you're ready to exit an investment, you can sell your shares to the more than 125,000 investors who have joined the Forge marketplace. This should make it easier to promptly and efficiently liquidate your investment.

Conclusion

Investing in pre-IPO companies is more restricted than investing in publicly traded corporations. To gain access to these shares and stocks, the majority of ordinary investors will need assistance from third parties. Individual investors can access pre-IPO stocks through private bankers, brokers, financial advisors, angel investors, and online platforms. Do your research before investing in any pre-IPO possibility. People and organizations who advertise fraudulent pre-IPO offerings frequently employ impressive-looking websites, bulletin board postings, and email spam to take advantage of investors who comb the Internet seeking e-businesses to invest in. To entice you, they offer spurious analogies between their company and well-established, prosperous Internet companies. However, these and other assertions that initially seem so plausible are frequently wrong or deceptive.