What Are Pre-IPO Stocks and Are They Worth It?

Before a private company goes public in an initial public offering (IPO), it can put aside several shares for purchase in a so-called pre-public offering . You can make a lot of money from stocks before an IPO, but the risks are significant as well, and it’s not easy to get these early stock offers anyway. Here’s how pre-IPOs work and how to find out if they are right for you.

What is investing before an IPO?

A pre-IPO is similar to an IPO in that it is an opportunity for investors to buy shares in a company for the first time, but different in that you are still investing in a private company rather than one that has just gone public. In fact, there is no guarantee that the pre-IPO will ever actually go public.

Since pre-IPO investments are usually offered in large blocks of shares, most of this type of investment is made by private equity firms, hedge funds, and large investment banks. Shares ahead of the IPO are also subject to a blocking period that prevents buyers from creating a secondary market in which they can sell their shares right away for short-term profits.

What are the benefits of a pre-IPO?

The big advantage of pre-IPOs is that they allow you to beat the crowd by owning shares in a company that could be the next Alibaba or Google. Plus, these promotions are usually discounted.

Investors can also benefit from a “first day spike,” where a stock makes significant gains on the first day of the IPO (for example, Alibaba shares traded 36.3% higher than their offer price on the first day of trading). … The upside potential can be enormous.

What are the risks of a pre-IPO?

There is no guarantee that the company’s stock will do well – and worse, your investment will remain hostage until the IPO is complete, which may never happen. And even if the company has initial “popularity” on the first day (again, no guarantees), the share price can still fall below what you paid for it later.

You will also have limited information or transparency about how a given company works, since the company will not be listed on the exchange yet. The best way to illustrate this is to imagine buying a group of We Work shares before the IPO – a much -publicized disaster for the business – right before their IPO fell apart.

How to invest in a pre-IPO

It’s not easy – unless you’re an institutional investor or a well -connected wealthy person – but there are still ways the average individual investor can place a pre-IPO placement, according to Finder.com.

  • Crowdfunding platforms. Invest through pre-IPO stock offering platforms such as OurCrowd , SharesPost or EquityZen .
  • Indirect impact. Companies usually invest in companies, so if you cannot directly back the stock, consider investing in a public company that is involved in a private fundraiser.
  • Pre-IPO brokers. Some banks, lending institutions and investment brokers specialize in pre-IPO share placements, so you can access pre-IPO shares through third parties.
  • Become a business angel. While not a viable option for everyone, becoming a business angel is one way to support private companies. Angel investors are allowed to participate in placements prior to the IPO, so if you are already qualified as an accredited investor, consider becoming a full angel investor and join the syndicated angel list.

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