Pre-initial public offerings (IPOs) involve the private placement of substantial blocks of a startup's shares before listing on a public exchange. Private companies or startups often offer pre-IPO stocks at a discounted price to investors willing to take a stake in the company to help it gain enough funding to scale up and launch its initial public offering.
Before the 2012 signing of the Jumpstart Our Business Startups Act, or JOBS Act, by the Obama administration, pre-IPO shares were typically only available for domestic and foreign institutional investors, accredited investors, hedge funds and private equity firms. Average retail investors found it challenging to invest in an IPO and nearly impossible to purchase pre-IPO stocks because of securities laws. The JOBS act significantly leveled the playing field.
Knowing how to buy pre-IPO stock can help you obtain shares in high-potential companies at rock-bottom prices. It is not uncommon for a pre-IPO stock to increase by more than 100% on its first trading day. However, while it presents a unique opportunity that can yield massive returns for individual investors, there are no guarantees. And pre-IPO investments carry genuine risks.
Suppose you have funds you're willing to stake for extraordinarily high potential returns. In that case, pre-IPO investments could be worth consideration. Benzinga looks into how you can buy pre-IPO stocks, how this move can benefit your portfolio and whether these alternative investment options suit you.
How to Buy Pre-IPO Stock
The simplest way to purchase pre-IPO stocks is through a specialized pre-IPO stock broker. Here's how it works.
Choose a Specialized Broker
Leveraging the services of pre-IPO stock brokers is your best bet for acquiring a high-potential pre-IPO stock of most startups. Pre-IPO stock brokers are specialized brokers and financial advisers who provide pre-IPO stock brokerage services. They may have purchased a bulk of the private company's pre-IPO stocks from early investors and company advisers with the hope of selling for a profit.
While some pre-IPO stock brokerage firms connect buyers and sellers directly, others give investors access to managed pre-IPO funds that enable diversified exposure to several pre-IPO companies. Forge Global, EquityZen, Nasdaq Private Market, SecFi and EquityBee are a few examples of these brokers.
Pre-IPO stock brokers typically impose different eligibility requirements for pre-stock trading. For instance, EquityZen mandates a $10,000 minimum as a qualifying criterion for its pre-IPO stock investment. Some pre-IPO brokers may have higher restrictions, with stock offerings only open to qualified buyers. Therefore, you must conduct comprehensive research to ensure that you meet the qualifying criteria for your chosen broker. Otherwise, you risk selecting a broker whose requirements exceed your bottom line.
Open an Account
Once you've identified a specialized broker and confirmed that you met all its eligibility requirements, you need to open an account. If you already have an account with your chosen broker, you can skip this step and proceed to the next. Most specialized brokers offer purely online brokerage services, simplifying the account opening processes. So regardless of your location or time, you can visit the website, create your account, provide proof of identification and finish the account setup in a short time without hassle.
Research Pre-IPO Stocks
Now that you've opened an account, it's time for the important business of picking your pre-IPO stocks. An excellent place to start is by researching companies on your broker's pre-IPO stock list. Although the private equity shares offered by most specialized brokers are typically above-average equities, you must conduct comprehensive research on available equities. The reason is that, while potentially earning a high return on investment (ROI) is the priority, you're also going to be a part owner of the company.
You must also understand that there are no guarantees that stocks in a specific company, or any company for that matter, will be available through your pre-IPO broker. For most brokers, you can enter your investment amount on the company website while waiting for them to source shares that can be bought. You get notified once shares are available.
Decide on Share Count
How many shares you can buy will depend on a combination of factors, including your risk tolerance, investment capital and the number of shares available. Suppose significant stocks are available from your companies of interest, and you have the requisite investment capital. In that case, you can add as many stocks as your investment strategy dictates. That's after you have done your due diligence on the companies. You can invest the bare minimum if you have low-risk tolerance or little investment capital. Remember, pre-IPO brokers offer varying minimum investment amounts to qualify for pre-IPO stock purchases.
Fund the Account and Place Your Order
Once you've decided on the volume of shares you want to buy, you can fund your account to purchase the shares. Most brokers provide an electronic payment option that allows you to transfer funds quickly and easily using your credit card. All you need to do is go to your account profile's payments section, select electronic payment and follow the instructions provided by your broker. You can also fund the account by mailing a check if your broker permits.
After you've funded your account, you can place a purchase order for the pre-IPO stocks of your choice. Your broker will initiate a stock acquisition transaction on your behalf as soon as you place your buy order. And shortly, you'll have your pre-IPO stocks.
Besides using a specialized pre-IPO stock broker, trading publicly traded venture capital firms or private equity exchange-traded funds (ETFs) is another way to invest in pre-IPO stocks. Publicly traded venture capital firms such as Apollo Global Management Inc. (NYSE: APO), Carlyle Group Inc. (NASDAQ: CG), Blackstone Inc. (NYSE: BX) and many others allow investors to buy stock in a company that manages a portfolio of pre-IPO stocks.
Private equity ETFs like ProShares Global Listed Private Equity ETF (NYSEARCA: PEX), Invesco Global Listed Private Equity ETF (NYSEARCA: PSP) and Morgan Creek-Exos SPAC Originated ETF (NYSEARCA: SPXZ) pool investor funds to purchase a variety of private equity shares including pre-IPO shares. These alternative approaches grant you indirect access to diverse pre-IPO stocks, reducing potential gains and attendant risks.
They can be appropriate for investors who believe that the risks of investing directly in pre-IPO stocks are too high or who do not meet the criteria of those specialized brokers but still want to expose their portfolio to the pre-IPO market. If you choose to buy your IPO stocks this way, keep in mind that private equity funds are actively managed and may charge significant fees.
You must also understand that pre-IPO shares have a lock-in period during which they cannot be sold or traded. The implication is that once you've purchased your pre-IPO stocks, your funds could be locked for an extended period of about 180 days. Pre-IPO companies take this measure to prevent pre-IPO investors from immediately selling their shares once the company goes public.
Why Invest in Pre-IPO Stocks?
Compared to conventional stock market investments, pre-IPO investing can offer immense benefits — here’s a look at some of its unique advantages.
Potential for Exponential Returns
Pre-IPO stocks have a strong potential for rapid growth. They provide a significant opportunity for exponential returns on investment because of their lower initial market value. There have been numerous instances in the past where pre-IPO stocks have returned high profits to early investors. Alibaba Group, the Chinese conglomerate which went public in 2014, is a famous pre-IPO success story.
Before going public, Alibaba offered pre-IPO shares to investment firms and high-net-worth individuals for less than $60 per share. A few months later, Alibaba went public in the world's largest IPO to date, with its share price reaching $90 on the first day. The subsequent rise enabled Ozi Amanat (a Singapore-based venture capitalist who purchased about $35 million worth of pre-IPO shares) and other investors to earn a 50% return on their investment within months.
Discounted Share Price
Private companies typically offer pre-IPO stocks at a discounted price. They do this to entice investors and mitigate the risks of purchasing private equity. This process can create a unique win-win situation for pre-IPO investors. For instance, suppose a company sets its IPO price at $10 per share and offers its pre-IPO shares at $5 per share. If the company's share price falls from $10 to $5, investors who purchased the company's shares at $10 will lose money.
Meanwhile, as a pre-IPO investor, you remain unaffected. However, if the company does well and its share price rises significantly after going public, you gain considerably more than someone who bought into the company during its IPO.
Significant Long-Term Growth Potential
One of the most significant perks of pre-IPO investing is that you're investing in a young, growing company. You can benefit immensely from the company's long-term growth if it operates profitably. It is not uncommon for million-dollar startups to become billion-dollar public companies over time, particularly in the technology industry. So investing in a company during the pre-IPO stage could result in enormous future returns, allowing you to grow your wealth in the long term.
Who Should Invest in Pre-IPO Stocks?
Despite its potential benefits, buying pre-IPO stocks involves significant risks. And as such, they're best suited for investors with high-risk tolerances and long-term goals. The categories of people that should consider investing in pre-IPO stocks include:
Investors With an Ownership Interest in the Company
Pre-IPO placements typically allow a company to raise funds before it goes public. As such, it's often sold at a rock-bottom price. And so, if, for some reason, you have a vested interest in a company and hope to own part of it, you can leverage its low pre-IPO price to accumulate a substantial volume of its stock. While your primary goal here is part-ownership, you also stand to earn significant ROI, which can make you a winner regardless of whether the IPO succeeds or fails.
Investors With a High-Risk Tolerance
Not all pre-IPO investments turn out to be successful. While some yield substantial returns, others never go public at all. As a result, the pre-IPO is a relatively risky investment strategy. They are not appropriate for, say, a retirement investor looking to accumulate dividend funds for retirement. However, they can be an excellent way for investors with higher risk tolerance, such as value investors, to diversify their investment portfolio.
Investors With Long-Term Investment Horizons
Investing in pre-IPOs is not a get-rich-quick scheme. A company in the pre-IPO stage may take several months or years to go public. This factor makes it unsuitable for short-term investors. However, a pre-IPO stock can be ideal if your investment strategy involves a long-term goal.
Risk Assessment and Investment Goals
Investing in pre-IPO stocks can offer opportunities for investors, but it comes with risks. Understanding how to buy pre-IPO stocks, conducting research, funding the account and placing orders are important steps. Investors can also explore alternative options for exposure to pre-IPO stocks. However, it is crucial to consider the risks and align with investment goals.
Best Online Stock Brokers for IPOs
Benzinga analyzes, reviews and provides valuable insights on buying pre-IPO stocks and individual stocks of companies, including technology, insurance, finance, cannabis and virtual payment platforms. See the list of best online brokers for buying IPO stocks before they go public.
- Best For:Active and Global TradersSecurely through Interactive Brokers’ website
- Best For:Beginnerssecurely through Robinhood's website
- Best For:Futures Tradingsecurely through TradeStation's website
- Best For:Experienced Traderssecurely through Freedom Finance's website
Frequently Asked Questions
Can you buy an IPO before it goes public?
Yes. Among other methods, you can buy a company’s IPO stock as soon as it starts trading on a pre-IPO stock brokerage.
Is it good to buy IPO stocks?
Yes, buying IPO stocks can be a very profitable investment opportunity. However, it is essential to note that it carries significant risks as IPO companies typically lack a proven track record of operating publicly at a profit. So it’s hard to tell if the company will fail or succeed.
Should you consider pre-IPO investing?
Pre-IPO investing can be beneficial for investors as it allows them to invest in a company before it goes public and potentially benefit from its growth. However, it comes with risks such as limited information and illiquidity, so investors should evaluate the potential risks, rewards and existing securities laws before considering it.