How to buy IPO before it goes public

In financial markets, the most effective way to raise funds for a company is through a bank loan or public listing via IPO or DPO or SPAC route, also known as equity investing. However, the flip side of taking a loan is that it is expensive. Moreover, the company needs to service the debt or loan by paying back interest and principal amounts. Therefore, evolving companies with the promise of scalability and sustainability often take the IPO route to raise funds used for expenditure, management, etc. 

Defining IPO

Traditionally, IPO has been the most trusted method to raise funds against debt or loans. Initial public offering (IPO) implies that the shares of a company are being traded for the first time on the stock exchange or offering shares to the general public. 

An IPO stock offering is floated, allowing investors to shares. After the successful IPO launch, the company is officially listed on the stock exchange. After the successful launch of the IPO, companies incorporated in Canada often get listed in the Toronto stock exchange (TSX) or the TSX Venture (TSXV), two of the leading stock exchanges catering in Canada.

Benefits of an IPO

An IPO offers a win-win situation for both the stakeholders of the company and the investing public:

The company gets an added advantage to raise funds quickly, thereby attracting a diverse pool of investors.

It comes under the public eye, gaining prominence.

A fair subscribed or a successful IPO is talked about in the investing community.

The company can emerge as a favorite stock every investor wants in their portfolio.

Investors often like to capitalize from IPO stock offering before it goes public and reaps maximum returns. These stocks can be later sold in the secondary market at a higher and appreciated price, earning a handsome return for the investor.

Few methods are exclusively available to select groups wherein IPO shares are offered separately. It can be either through pre-IPO shares or by offering pre-placement IPOs.

How to buy pre-IPO shares

The company's decision to go public and sell the shares in the open market is called the IPO phase. 

In the initial stages of this phase, companies offer pre-IPO shares to only a select group of people holds. Company employees and select investors are often the first recipients of these shares before issuing them to the investing public.

In Canada, the pre-IPO stock is available to authorized investors. The Canadian law defines these authorized or official investors as individuals with an annual income of over C$200,000 if they are salaried or an annual income of C$300,000 if they are self-employed. As mandated by law, the net worth of these investors should be C$5 million or the gross assets to be worth C$ 1 million. 

These pre-IPO investors can enjoy the stock's exponential growth and return in future. Pre-IPO stocks are also are offered at a discounted price. By the time the IPO is officially launched in markets, the investors sometimes enjoy massive returns by netting the difference. 

What is a pre-placement IPO?

Once the total amount to be raised and the total number of shares to be issued is decided, a portion of the IPO is offered to private players or investors. This happens just before the launch of the IPO. 

Since most individual investors can't invest in such massive amounts, the participants in the pre-IPO placement are generally hedge funds, private equity players. They invest a significant stake in the company. As the volume or stakes is large, the price offered of the pre-IPO shares is less than the price of the IPO offered to investors.

The investors call for a pre-placement IPO if they perceive an IPO as a trending or much-talked-about company. When a pre-placement IPO is offered, the risk of the IPO also decreases at the same time. As a result, there is confidence that these private participants would buy a stake in the company.

The pain point for a Canadian investor, who qualifies and seeks to invest in a pre-IPO, is that there isn't a standard prescribed platform to trade pre-IPO shares. An investor needs to consult a qualified and licensed financial advisor for this. Only the licensed advisors can promote and advise on pre-IPO dealings.

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Going public in Canada

A company willing to be listed on the TSX or TSXV must comply with the listing requirements. The minimum listing requirements, be it financial and distribution requirements, vary with the application category. 

For instance, a company can choose to list in mining, energy, or financial category on the TSX. If the nature of business is not understandable, then TSX will place it under a specific category after reviewing the applicant company's financial reports. 

To issue IPO requests, TSX has mandated the applicant company to appoint two independent directors – a chief executive officer (CEO), a chief operating officer (CFO), and a company secretary. 

There are inherent risks of investing in IPO and pre-IPOs instead of investing and trading in the equity segment of the secondary market. The stocks and shares on the secondary market are relatively liquid, and there is no loss in price while selling those shares. The IPOs or pre-IPOs have a high degree of risk as these investments are not liquid. It has to prove its worth in the stock market. There is a high degree of uncertainty and volatility. These factors make it even more difficult for the investor to cash or liquidate the position immediately if things go wrong.