Pre-IPO offerings can yield high returns but beware of the risks.
There are some things to know before investing in Pre-IPO companies. Investing in an IPO can be profitable, but sometimes you are able to invest in a company even earlier via a Pre-IPO offering. Here are the details.
What is a Pre-IPO Offering?
Pre-IPO offerings are shares of stock that companies offer to investors before an IPO. In other words, before their IPO.
Companies often use a process called Pre-IPO Placement to sell shares to investors before an official IPO. Pre-IPO Placement is a sale of large blocks of shares before the stock is listed on a public exchange. Buyers tend to be large institutions and hedge funds. Due to the large size of the investments and the risks involved, the shares will often be sold at a discount compared to the stated IPO price. There are often lock-up periods associated with these offerings to prevent investors from selling their shares in the short-term.
There is often no prospectus or even a guarantee that the company will go public. These offerings help a young company raise capital, but due to the risks involved, they will offer shares at a discount to investors.
Pre-IPO offerings are typically reserved to institutions and normally aren’t open to individual investors. The IRS has a special class of individuals that it classifies as 708 investors who are eligible for Pre-IPO sales. A 708 investor typically needs to have at least $2.5 million in assets and income of $250,000 or more to qualify for this designation.
As you can see, the barriers to entry for this investment type is high, but if you qualify there are some things to be aware of.
Risks of a Pre-IPO Offering
The largest risk that you face is that the company will fail, and the stock will be worthless. Investing in IPOs are risky and can lead to a total loss of your investment.
There is a chance that the company may not go public. IPOs will often be delayed or even cancelled due to any number of unforeseen reasons.
A huge risk with IPOs is that it is hard to get reliable information about the company. Publicly traded companies must disclose detailed financial information, but private companies have no such requirement. The information that you do get is often suspect and unreliable, so even the most sophisticated investor may have trouble making an educated investment in a Pre-IPO offering.
Your best resource to find information is the company’s PPM or Private Placement Memorandum. Information about the company, its management, and its finances are found here. Read it carefully and get a second opinion if you feel it necessary.
Things to Keep in Mind
Here are some things to know before investing in Pre-IPO companies.
Finding information can be difficult but use all available resources that you can find before investing.
Be sure to start small and only invest in smaller amounts. Chasing after the next Google or Amazon probably isn’t realistic. By the same token, be patient with your investments and don’t expect to get rich overnight.
Finally, be aware of the risks. These investments are often not safe and subject to total loss.
Conclusion
There are some things to know before investing in Pre-IPO companies. The main takeaways are that these investments can be risky, and that reliable information can be difficult to find. Barriers to entry are high, but if you qualify and want to invest in Pre-IPO offerings, then keep a few things in mind. Do as much research as you can. Start small and be patient. Finally, be aware of the risks and be prepared for a total loss of investment.
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Writer and Investor. Based in the Pittsburgh, PA area, Brian holds full-time employment as a Warehouse Manager for an electronics firm. Brian enjoys wealth building, investing, gardening and the great outdoors. Brian holds a B.A. in Environmental Studies from the University of Pittsburgh and an MBA from Robert Morris University.