What is pre-IPO and how to invest in private shares? - Kalkine Media

November 07, 2021 12:11 AM PDT | By Versha Jain
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  • Pre-IPO companies are generally private companies having an intention to go public.
  • Pre-IPO allows shareholders and investors to transact in private companies before they go public.
  • The absence of SEC scrutiny and lack of adequate information about these companies in public may make the stocks less liquid and risky.

Most ordinary people might be aware of an initial public offering or an IPO in the stock market but perhaps less familiar with a pre-IPO or pre-initial public offering.

So let us understand first what an IPO is and then what a pre-IPO placement is.

What is an IPO?

When a private firm wants to go public, it offers shares to the public through a process called initial public offering or IPO. For this purpose, the company gets listed on the stock exchange, and receives a ticker symbol, with a pledge to follow the exchange's trading rules. Stock listings give firms more opportunities to attract potential investors, including retail traders.

For an initial public offering (IPO), the company must file for registration with the SEC. The companies with a pre-IPO valuation of US$1 billion or more are called unicorns. Thus, IPOs offer more opportunities to attract many investors and grow quickly.

In addition, the stock becomes liquid after the public offer.

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What is pre-IPO?

A pre-IPO is an offer for investment in a private company. The comparatively younger and smaller companies raise capital to become big so that they can further expand and go public one day. Pre-IPO companies are generally private companies with an intention to go public. 

Many investors look for pre-IPO companies to make money when stocks get listed. But they must stay invested for a lock-in period, meaning they must hold the stocks for a fixed period after the company goes public. It is to stop buyers from selling them soon after the IPO.     

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But as the saying goes: high-risk brings high gain, early investors might have a chance to earn more than those entered at a later stage.

While IPO hopefuls need to register with SEC to go through the customary scrutiny, private companies do not need to wait for approval to raise funds. But, if they decide to go public in the future, they will have to register with the stock market regulator.

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 (What is pre-IPO?)

Source – Pixabay

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Pre-IPO placement

Pre-IPO placement means the sale of private company shares before their exchange listing. Typically, investors, like private equity firms, angel investors, venture capitalists, hedge funds, etc., invest in such shares. But because of the risks involved in a pre-IPO placement, buyers can get a decent discount on the share prices compared to the proposed IPO rates.

Conversely, pre-IPO placement gives a chance to private companies to reduce the risk involved in an IPO process; for instance, if it remains undersubscribed or does not go as planned.  

Likewise, for buyers, it is a win-win situation because they get them at a rate discounted, although there are risks. Besides, investors might not always get to buy shares in an IPO.

However, in a pre-IPO placement, there is no guarantee that the company would go public one day. So, the discounted share price, in a way, is to compensate for that risk.

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Generally, pre-IPO placement is for high-net-worth individuals with adequate knowledge of the financial market. Some experts believe pre-IPO share purchase might be more profitable. However, investors must exercise due diligence before investing in an IPO or pre-IPO. 

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How to invest in pre-IPO companies?

Earlier, only high-net-worth individuals could participate in a pre-IPO, but now anyone can invest. Pre-IPO shares can be bought from online platforms or intermediaries, which purchase them from company employees (ESOP) or existing investors and sell them to new investors.

An investor should choose a trustworthy intermediary or platform for the pre-IPO purchase. They can also check relevant information from the company websites or through brokers.

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Here are some platforms that offer pre-IPO investment opportunities.

Equity Zen 

It is based in New York and serves over 300 companies. The combined market cap of these companies is estimated to be around US$1075 billion. The Equity Zen platform provides access to pre-IPO and late-stage technology companies to accredited investors. By leveraging technology and market experience, such platforms are making big strides in recent times.

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Forge Global 

Forge Global, Inc. is a global private securities marketplace that leverages technology, proprietary data, and partner coalition to offer a private market ecosystem. 

The company offers private company shareholders to sell their shares on its platform and connect with more than 125,000 individual and institutional buyers. In addition, Forge Global enables stock transfers compliant with the company's protocols.

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Finally, experts believe pre-IPO share purchase has risks, but also provide an opportunity to benefit in the long term. Since they are bought at discounted rates, investors can earn when the stocks get listed and their value rise. Typically, unlisted shares have less price volatility than the listed ones. Still, investors must exercise due diligence before investing in the stock market.


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