Pre-IPO stocks are basically shares that are sold out to private institutions prior to being sold out in the public equities. Initial Public Offering are intended by stockholders, before they go public, to make investments in order to either raise new capital or maximize shareholder value.
Features of Pre-IPO Stocks:-
- Investing in unlisted shares carries a high level of risk, but it also carries the potential for much higher returns because early investors stand to gain the most before the company is listed on the stock exchange because there are potential value unlocking opportunities and upsides as well as the assurance of investing in a company that may experience strong IPO demand.
- In compensation for carrying the risk of unauthorized shares without a prospectus, investors receive a price discount from the reasonably expected IPO price.
- From the standpoint of a seller, it demonstrates an positive approach to the company’s launch in that the price will not rise immediately after it opens.
How should a buyer proceed towards buying a Pre-IPO Stock?
Companies can market their initial public offerings in a variety of ways (IPOs). Large blocks of shares are frequently purchased by venture capital or startup investment firms as part of the initial financing. Prior to an IPO, a select group of investors can purchase discounted stocks from IPO underwriters. This is referred to as pre-IPO placement. Prior to the IPO, some companies offer stock options to their employees. Unlisted shares may be purchased from middlemen and trading platforms that are experts in locating and putting unlisted shares as well as facilitating trades.
When selecting a company to invest in, it is critical to understand the business model, management team, financial performance and business updates, and valuation based on current market price. Investors should consider the ease of liquidating investments, fundamental and valuation checks, and the use of specialized brokers, such as Forge Global, which recently merged with Shares Post to form a major pre-IPO marketplace. Forge connects sellers of pre-IPO stock with buyers.
Contacting banks, non-banking financial institutions, and accounting firms will allow you to purchase pre-IPO shares directly from the company. Participate in startup pitch competitions and events, and keep an eye out for companies seeking investment or planning to go public. Engage in stock tokenization on sites like tZero or AngelList that facilitate crowdfunding or using Private Equity Exchange-Traded Funds (ETFs), which pool investor funds and buy a variety of private equity shares, to diversify a range of private equity investments, reducing potential gains but also significantly reducing risk.
Although they require a high-risk tolerance profile, pre-IPO and unlisted shares are fantastic options for investors. It may be challenging to purchase shares using these tools unless you are a significant player or an employee of the company. Before making any investments, be sure to seek professional advice.