Pre-IPO investing is a way through which you can get massive gains. It is when you make an investment in a private company before it goes public. An IPO (initial public offering) is the public trading of any private company’s shares for the first time. Not everyone can get access to pre-IPO shares. It is used to be for billionaires and only to accredited investors. The buyers were mainly hedge funds, private equity firms, and some other groups willing to invest a considerable amount. But now, times have changed.
In 2012, Barack Obama passed the jobs act. The act makes it easier for private companies to go public to raise their private capital or staying private longer. Additional benefits for private companies include:
- Increases the number of shareholders a company can have to 2000 before it can register itself through SEC.
- Allows over 500 unaccredited investor
- It also increased the limit of securities offering from $5 million to $50 million under regulation A.
- Enable different types of equity crowdfunding.
In 2015, SEC accepted all titles from the JOBS Act. These rules came into work in 2016. Now unaccredited investors can also buy and sell shares from pre-IPO Companies.
Why would you Invest in Pre-IPO Companies?
The biggest and foremost reason to invest in pre IPO companies is gaining. You can get tremendous gains from investing in a company whose shares traded publicly for the first time. Let’s compare stock market returns with pre-IPO returns.
Historically, the stock market exchange gives you a profit of 10% annually. But, for PRE-IPO returns, if we take Lemonade as an example. It went public in 2020; let’s suppose you made an investment of $10,000 before it went public(2017 share price). It would have turned into $55,000. Back in 2017 Lemonade startup was value at $600 million and today it is value at more than $3.4 billion. That’s a huge gain! So pre-IPO is a big win in the case of profits.
Another reason to invest in pre IPO companies is avoiding stock market volatility. In the events of crises such as the 2008 financial crisis or 2020 pandemic, pre IPO investment doesn’t get affected as much. It can impact companies but not that much.
Investing in pre IPO companies comes with risk. Startup companies’ success is not guaranteed. So when an investment fails, it will cause you losses and no returns.
To come up with these risks, companies offer shares at less value than average. It brings investors and also secures the company. Therefore, if the company goes public and the IPO is failed, the company still has private companies’ funds.
How Can You Invest in Startups?
After knowing well enough about the pre IPO investment and its pros and cons, you might be thinking about how you can invest in such companies. So here is how you can do it:
- Talk to a stockbroker or advisory firm who are specialized in pre-IPO shares. They can advise you on how to choose companies wisely.
- Keep an eye on companies looking to go public
- Make a business connection
- Speak with local bankers for companies looking for investments
- Invest through trusted online platforms such as Equitybee, Sharespost and EquityZen.
Investing in pre IPO companies is risky yet beneficial. If you choose wisely and make the right investment, you can make huge money through pre IPO investment.