The short version
- Pre-IPO investing is when a company offers private shares of stock to hedge funds, private equity firms, or other investors.
- Many factors are involved in buying pre-IPO shares like accreditation, lock-in periods, and more.
- Pre-IPO investing can be high risk, high reward, and high fee. Pre-IPO investing provides unique risks and advantages compared to public exchanges.
What is pre-IPO investing?
Typically, companies looking to go from private to public corporations offer new stock to investors called initial public offerings, or IPOs. Pre-IPO investing is when a company sells private shares of stock to raise capital before an initial public offering. Companies may sell these shares to hedge funds, private equity firms, and wealthy retail investors.
Unlike initial public offerings, pre-IPO shares are offered privately to certain investors instead of public stock markets. Because of their exclusivity, pre-IPO shares and stocks are also more difficult for retail investors to access. Retail investors may need to work with a private brokerage firm or financial advisor to access these shares.
Pre-IPO purchases are regulated by the Securities and Exchange Commission’s (SEC) mandatory six-month lock-in period. The lock-in period was established to prevent investors from liquidating their company shares soon after purchasing them, protecting the shares from extreme volatility and pressure coming from the public market.
More: IPO investment: should you invest in an IPO?
Investing in pre-IPO stocks
There are a few ways to buy shares of a company pre-IPO, but keep in mind that they come with more restrictions than with other stocks.
For starters, these shares are usually limited by law to accredited investors. According to the Securities and Exchange Commission, accredited investors must have an earned income of at least $200,000 in the two most recent years or a net worth of over $1,000,000, excluding a primary residence. In 2020, this definition expanded to include individuals with relevant financial knowledge and expertise, increasing the number of people who may qualify.
Being an accredited investor can allow you to invest in more private exchanges. But you’ll still need to contact a financial advisor, private broker, or local bank to help you access these shares.
Note that a few major brokers like SoFi, TD Ameritrade, and Fidelity allow some of their clients to participate in IPOs before they hit the secondary stock market. However, none of these brokers will allow you to invest in a company before its IPO has been announced.
Angel investing pre IPO
Another option to invest in pre-IPO stocks is as an angel investor. Angel investors are individuals with a high net worth who often invest their own money in a company during its risky startup phase in return for a stake in the company. However, because they invest early on in the life of a company, angel investors probably won’t see quick returns.
Pre-IPO investing platforms
Individuals who may not have a plethora of cash to pour into a company may find a more approachable method to investing in private companies through online crowdfunding platforms. Some popular pre IPO investing platforms include:
StartEngine is a US-based equity crowdfunding site that enables companies to raise capital via Regulation Crowdfunding and Regulation A+. The platform has helped more than 500 companies raise over $600 million to date.
Benefits of using StartEngine include access to liquidity for investors (via the StartEngine Secondary marketplace), a wide range of investment opportunities, and up to 20% bonus shares for investors who invest early.
Companies that are listed on the platform right now include Boxable, Jet Token Inc., Trade Algo, and GoSun Inc. Minimum investments vary by project.
EquityZen is a marketplace that allows investors to buy or sell shares of private companies. To invest in a private company on EquityZen, you must first become a member of the platform. Once you're a member, you'll be able to view all of the companies that are currently available for investment.
You can then decide how much you want to invest in each company. EquityZen has a minimum investment amount of $10,000, but this may be reduced if you invest in five or more deals.
Some of the companies that are currently available for investment on EquityZen include Chime, SpaceX, ByteDance (parent company of TikTok), Uniswap, and many more. Once you've made your investment, you'll be able to track the progress of the company and cash out your investment when it goes public or is acquired.
Raison is unique because the app is built on blockchain technology. That means you can invest in some of the hottest startups in the world without being an accredited investor.
And you can do it with fractional shares, so you don't have to shell out a ton of money to get started. Raison allows anyone to start investing in late venture deals for as little as 0.1 of a share.
Right now you can find companies like Klarna, Patreon, Neuralink, Scale AI on the Raison app. In the past, some of the most well-known companies that have been listed on the platform include Airbnb and Robinhood.
Linqto is a private investing platform that provides accredited investors with access to shares of private companies. The minimum investment is $10,000 and there are no ongoing fees. Investments currently available include Ripple, Uphold, Bloomreach, BitPay, and Tradeshift.
MarketX is an investment platform that provides clients with access to pre-IPO and growth-stage investments opportunities. It has a streamlined process for evaluating and exiting these opportunities.
MarketX also offers group buying, which allows investors to pool their resources and gain access to deals that they may not have been able to access otherwise. Finally, MarketX has a global focus, with deals available not only in the United States, but also in markets such as China, Singapore, Indonesia, India, and the UAE.
Forge gives investors access to leading private growth companies. Some of the companies currently available for investment include Boxabl, Scale AI, Miso Robotics, The Boring Company, and more.
When you're ready to exit an investment, you'll be able to market your shares to the over 125,000 investors that have joined the Forge marketplace. This should make it easier to sell your investment and cash out quickly and efficiently.
Benefits of investing pre IPO
One significant risk for startups and other businesses in the pre-IPO phase is the outsized potential of bankruptcy. There is no guarantee that the initial public offering will perform well, meaning they may be unable to raise the capital needed to stay afloat. This risk can then be passed on to investors, who may lose their investment completely.
To mitigate risk, anyone who might invest in pre-IPO stocks should carefully read the company’s Private Placement Memorandum (PPM). The PPM is a business plan that outlines the details of the terms of the investment from the company issuing it, similar to a prospectus for a publicly-traded stock or fund.
Even with a PPM, businesses in private markets may not be as transparent as publicly-traded companies, which must disclose certain financial information to the public by law.
But on the other side of the coin, pre-IPO shares do have the potential for larger gains. Early investors can get these stocks or funds at lower share prices before any are available on a public exchange. Since fewer investors have access to pre-IPOs, the rewards could be more significant for the select few who get this buy-in.
More: Investment risk 101
Is pre-IPO stock investing a good idea?
If you’re an accredited investor, have a high net worth, or have a high-risk tolerance, pre-IPO stocks may be appropriate. Getting into pre-IPO stocks early tends to offer a higher return when the stock goes public and lists on the New York Stock Exchange, NASDAQ, or elsewhere.
For the average person, pre-IPO stocks may not be a great idea. While the reward for a successful investment can be very high, the risk is very high as well. This is especially true for someone who isn’t well-informed on market trends and how the company operates.
The bottom line
Pre-IPO investing is more limited than investing in publicly-traded companies. Most retail investors will need external help to access these shares and stocks. Private bankers, private brokers, financial advisors, angel investors, and online platforms are options for retail investors to access pre-IPO stocks.
Like many investments, pre-IPOs come with high risk but can lead to a big payoff**. Intelligent investors who put their funds into the right company could see a huge profit.** However, poor IPO performance, bankruptcy, limited transparency, and other factors might result in massive losses.
Pre-IPO stocks may be a good investment for those with a high net worth and a high-risk tolerance, so if you’re seeking to understand startup companies and make returns before a company goes public, a pre-IPO purchase may be a reasonable addition to your portfolio. For most people, however, it’s probably best to stay away.