Definition and Examples of Pre-IPO Investment
Pre-IPO investment occurs when a company sells its securities before it goes public. It is a type of private investment where companies often sell shares to investors in private equity and venture capital at prices lower than the planned public offering price.
As a means to attract investors to participate in pre-IPO investment, companies often promise high returns by giving investors the opportunity to come into the project from the beginning before inviting public investors to join.
One notable example of pre-IPO investment occurred in 2019 when PayPal agreed to purchase $500 million of Uber’s common stock before Uber’s shares were publicly listed.
How Pre-IPO Investment Works
Pre-IPO investment is a type of private investment, meaning that the company issues unregistered securities. Due to regulations by the Securities and Exchange Commission (SEC), the securities in private investments are typically only available to accredited investors. An accredited investor can include:
- An individual earning more than $200,000 (or $300,000 with a spouse)
- An individual with a net worth of $1 million, either alone or with a spouse
- An individual holding a valid Series 7, 65, or 82 license
- A trust with assets exceeding $5 million
- An entity with investments greater than $5 million
- An entity in which all equity owners are accredited investors
The shares sold by the company in a pre-IPO investment differ from those purchased in a traditional exchange because they are unregistered. In other words, the company was not required to register them with the SEC and did not have to provide the same disclosures required of publicly traded companies.
It’s also important to note that the shares sold in a pre-IPO investment often come with restrictions. For example, the investor may be required to hold the securities for at least one year before they can resell them. These restrictions apply even if the company goes public during that time. Additionally, since the share restrictions transfer to the buyer, you may have difficulty finding someone willing to buy your shares.
Although private investments are a popular type of deal, pre-IPO investments are unique in that they often occur before the company issues its initial public offering.
Advantages and Disadvantages of Pre-IPO Investment
Advantages
- Potentially higher returns: Because you are buying shares before they are available to the general investing public, you may achieve higher returns than if you waited.
- Discounted shares: Shares in pre-IPO investments are often sold at a price lower than the planned public offering price.
Disadvantages
- Typically only available to accredited investors: SEC regulations restrict private investments to accredited investors, which means most investors cannot participate.
- Higher risks: Private investments do not require companies to register shares with the SEC or provide the same level of public information. As a result, these pre-IPO investments can pose higher risks to investors.
- No guarantee that the company will actually go public: Although pre-IPO investment often happens before a company goes public, there is no guarantee that the company will actually go public.
What
What does it mean for individual investors?
As an individual investor, you are likely not eligible to participate in investments before the initial public offering (IPO). First, because the securities in question are unregistered, these transactions are only available to accredited investors. Additionally, as we see in the example of selling Uber shares before the IPO of PayPal, these transactions are often conducted as private placements rather than in the public market.
If you are not an accredited investor, be cautious if you are approached about investing in pre-IPO investments. There are known scams where companies offer shares before the IPO to individual investors.
If you are an accredited investor and have been given the opportunity to invest in shares before the IPO, make sure to do your due diligence before investing. Since the company has not yet gone to the public market, it is not required to provide the same disclosures that companies which have already gone through an IPO provide. Learn as much as you can about what the company is selling, who the management team members are, and who is funding the pre-IPO offering.
Furthermore, because the shares are unregistered, you may face trading issues. Unlike publicly traded stocks, it can be difficult to sell unregistered shares.
Was this information helpful?
Thank you for your feedback!
Source: https://www.thebalancemoney.com/what-is-pre-ipo-placement-5197748
Leave a Reply