What is Pre-IPO Investing?

Initial public offerings (IPOs) become major news items that stir up excitement for a corporation issuing public shares for the first time. This move rewards early investors and makes shares more accessible to retail investors. An exciting IPO can quickly soar well beyond the initial price per share. Pre-IPO investing lets you capitalize on that gain instead of missing out like the other retail investors. This article discusses how this process works and ways to invest in pre-IPO companies.

How Does Pre-IPO Investing Work?

Pre-IPO investing lets you acquire private shares before a company issues public shares. You can usually get preI-PO shares at a discount compared to the price investors will pay for public shares. Pre-IPO investments carry more risk than publicly traded companies, but the potential reward is much higher. Investors seek alternative routes like pre-IPOs and wine investing to increase returns and diversify their portfolios.

Why Invest in Pre-IPO Companies?

IPOs have always been popular, but pre-IPO companies are gaining momentum. Seasoned investors see an opportunity in this market, and there are reasons to consider pre-IPOs.

Opportunities for High Returns

Investors buy pre-IPO companies because they can receive a high payoff in a short amount of time. Buying shares a few weeks before an IPO date can provide significant gains on the first day if the company has strong demand. Some stocks gain more than 20% on their IPO days. Traders may use this movement to make a quick profit. If the asset has a bad IPO but solid fundamentals, you can wait it out and add to your position to lower your cost basis.

Discounted Pre-IPO Stocks

Pre-IPO stocks have less certainty. IPO days are extremely volatile for these stocks, and pre-IPO investors take a risk buying a company before it goes public. Companies reward this risk by providing discounted prices on their stocks. You can accumulate shares at a price lower than the announced IPO share price. Discounted shares lower your cost basis and let you obtain more shares with the same capital than if you waited for the stock to go public.

Potential for Wealth Building

Pre-IPO investments in solid companies can produce life-changing returns. Some small-cap companies become large-cap companies in the future, and investors who ride that momentum can retire much sooner. Alternative investments like pre-IPO investments can provide outsized returns, especially for long-term investors. While some pre-IPO investors may see an opportunity to exit positions for quick profits, others stick with a stock for many years because of the company’s potential.

3 Ways to Invest in Pre-IPO Companies

Pre-IPO companies can help you outperform the market and achieve your financial goals sooner. These companies have become more accessible to investors in recent years. Some of the ways you can get exposure to these assets and accumulate shares are outlined below.

Hedge Funds

Hedge funds are alternative assets that have more flexibility than mutual funds. These funds can engage in riskier activities, including pre-IPO investments. Professionals manage the hedge fund on your behalf and make strategic investments to deliver strong returns. These funds can also access investments that are less accessible to retail investors.

Pre-IPO Investing Platforms

Pre-IPO investing platforms give you a more hands-on approach to buying private companies. These platforms let you pick the companies you want to buy instead of hoping a hedge fund purchases pre-IPO companies you would want to own. You will have to do more research to pursue this option because some of the pre-IPOs are unknown brands. It’s fun to think about buying the next Apple, but not every IPO is a winner. This can be a more rewarding option than hedge funds if you do detailed research for a pre-IPO company before making a decision.

Secondary Market Places

Pre-IPO stocks trade privately on secondary markets shortly before going public. Accredited investors can enter this market and purchase pre-IPO shares before they go public. Institutional investors and employees of private firms use this market to exchange private shares. You need to fulfill one of these requirements to become an accredited investor and access this market:

• Earn over $200,000 per year You can also qualify if you and your spouse make a combined $300,000 per year. You must hit this income requirement for each of the past two years.
• Have a net worth exceeding $1 million, excluding your primary residence
• Work in the financial industry. The Securities and Exchange Commission has more details on its site.

Navigating Pre-IPO Shares

Pre-IPO shares let investors get early access to a company that’s about to go public. Pre-IPO investing can be an exciting and potentially lucrative way to invest in a company early on. It provides investors with the opportunity to get in on the ground floor of a promising company, while also allowing them to purchase shares at lower prices than what would be available on the open market. 

Frequently Asked Questions