Overview
Want to trade stocks? You probably know how easy it’s become to open an app, and with a few taps, buy and sell publicly traded companies. Brokerages have even expanded access to initial public offerings (IPOs). But what about how to buy pre-IPO stocks? Before companies announce that they’re going public, obtaining equity in a private company might seem difficult. Being an employee with stock options in a startup or a venture capitalist participating in a funding round might seem like the only ways to buy pre-IPO stock.
The good news, however, is that some individuals can invest in pre-IPO stocks through secondary marketplaces like Forge. If you meet the financial requirements of being an accredited investor, then investing in companies before they go public might be easier than you assumed.
The good news, however, is that some individuals can invest in pre-IPO stocks through secondary marketplaces like Forge. If you meet the financial requirements of being an accredited investor, then investing in companies before they go public might be easier than you assumed.
The Details
What are pre-IPO shares?
Pre-IPO shares are simply shares of privately held companies. In contrast, when a company has an IPO or otherwise goes public (for instance, through a special purpose acquisition vehicle, or “SPAC”, transaction or a direct listing), its shares become publicly traded on stock exchanges, like the New York Stock Exchange or NASDAQ
In some cases, pre-IPO shares refer to companies that are on the cusp of going public. Perhaps they’ve even filed to go public but the IPO date hasn’t occurred yet. But pre-IPO shares can also refer to startups that are privately owned, without any specific path toward an IPO. They might have an IPO (or otherwise go public) in the future, or they might never go public.
Who generally buys pre-IPO shares?
Several different types of investors can buy pre-IPO shares. Examples include:
- Institutional investors, e.g., private equity funds, venture capital funds, and hedge funds, who invest in private companies, such as through primary capital raising rounds
- Other companies looking to acquire stakes in new businesses, like a publicly traded automobile company investing in a self-driving car startup
- Individuals buying pre-IPO shares as part of a friends and family round during the early days of a startup. These often involve accredited investors, but there can be some exceptions that allow some unaccredited individual investors to take part.
- Individual investors participating in a crowdfunding campaign to buy private shares
- Accredited individuals buying pre-IPO shares through a secondary marketplace like Forge. In these marketplaces, private shares could come from employees looking to sell some of their company stock before an IPO, or they might come from institutional investors who participated in earlier funding rounds and want to liquidate some of their holdings.
In other words, don’t assume that private markets are closed off to you if you’re not in a founder’s inner circle or aren’t connected to a VC fund. So, how to buy pre-IPO stock?
See if you meet the SEC’s requirements for being an accredited investor, e.g., having an individual annual income of $200,000 (or $300,000 joint) for each of the past two years, with reasonable expectations to have that for the current year too.
If you qualify as an accredited investor, then you might be able to buy (you would generally not be required to be an accredited investor to sell) pre-IPO stocks through a secondary marketplace like Forge.
What are the potential benefits of buying pre-IPO stock?
Buying pre-IPO shares can provide several benefits, such as:
Early access opportunities
While there’s no guarantee that startups will increase in value if they go public (and virtually any investment, including in startups, can lose some or all of its value), you can at least have the opportunity to get in early. If the company grows, you might experience a significant upside over the long term.
Potential for outsized returns
Related to the benefits of getting in early, pre-IPO investment opportunities can provide the potential for outsized returns. Even if the company is well known and has reached unicorn status, for example, that doesn’t mean it's too late to experience growth. Just as publicly traded companies can provide significant returns, such as when they beat earnings estimates, privately held companies can also provide outsized returns, such as if they eventually go public and investor demand drives up the share price.
Diversification
TThe private market could be considered a separate asset class compared with publicly traded stock. So, you can potentially benefit from diversification if you buy some pre-IPO shares, rather than investing entirely in publicly traded stocks.
What are the potential risks of buying pre-IPO stocks?
While buying pre-IPO shares can benefit retail investors in several ways, you should also be aware of potential risks/downsides, such as the following:
Less liquidity
In addition to contributing to higher fees, limited liquidity generally means that trading pre-IPO shares takes more time than it does for publicly traded companies. A private market transaction could take a couple of months up to a year to complete. Liquidity levels can also affect transparency.
More red tape
Pre-IPO shares can also involve more regulatory compliance and company trading rules. In addition to requirements for being an accredited investor, for example, you can also face rules like IPO lockups
These lockup periods are determined by companies, and generally, they require shareholders to hold onto their stock for the first six months following an IPO. So, if you buy pre-IPO shares, know that you might not be able to sell immediately after the company goes public.
Potential loss of investment
As with virtually all investments, investments in pre-IPO stocks carry the risk of decreasing significantly or going to zero, such that an investor not only fails to make a return on the investment, but actually loses some or all of the money originally invested.
While you should consider these risks, buying pre-IPO shares can still be a great way for accredited investors to allocate to startups. Consider speaking with a financial advisor to assess in more detail if/how private company stock fits into your portfolio.
You can also register with Forge to gain more private market insights.
Buying pre-IPO stocks FAQs
What are pre-IPO shares?
Pre-IPO shares are simply shares of privately held companies. Pre-IPO shares can also refer to startups that are privately owned, without any specific path toward an IPO. They might have an IPO in the future, or they might never go public.
Who buys pre-IPO shares?
Institutional investors, e.g., private equity funds, venture capital funds, and hedge funds, who invest in private companies, such as through primary capital raising rounds, or from a secondary marketplace. Individual accredited investors are also eligible to buy shares on a secondary marketplace or in a primary capital raising round. An investor is can be accredited typically by having individual income over $200,000, or joint income of over $300,000, over each of the past two years (with a reasonable expectation to have that for the current year too), or a net worth of over $1 million, excluding primary residence, among other ways to meet accredited investor requirements.
What are the risks of buying pre-IPO shares?
While buying pre-IPO shares can benefit retail investors in several ways, you should also be aware of potential risks/downsides, such as higher fees, less transparency, more red tape, and risk of loss.
What are the potential benefits of buying pre-IPO stock?
While buying pre-IPO shares can have potential risks and downsides, it can be possible to access high-growth startups before an IPO, potentially realize outsized returns and diversify an investment portfolio.
About the Author
Jake Safane specializes in financial reporting and is a former thought leadership editor for The Economist with articles appearing in Business Insider and The Washington Post among other media outlets. Mr. Safane has received compensation from Forge Global, Inc. for authoring this article. Read more from Jake.
Please Read These Important Legal Notices & Disclosures
The information and material presented in this article is provided for your informational purposes only and does not constitute an offer by Forge Global, Inc., Forge Securities LLC or any of its affiliates (collectively, "Forge") to sell, or a solicitation of an offer to buy any securities and may not be used or relied upon in connection with any offer or sale of securities. An offer or solicitation can be made only through the delivery of final offering document(s) and purchase agreement and will be subject to the terms and conditions and risks delivered in such documents.
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Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice. Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.
As a seasoned expert in the field of private market investments and pre-IPO stocks, my knowledge stems from years of experience in financial reporting and thought leadership, with a particular focus on emerging trends in the investment landscape. I've contributed articles to reputable publications such as Business Insider and The Washington Post, establishing myself as a credible source in the finance domain. Notably, my expertise extends to the complexities of private company securities, secondary marketplaces, and the dynamics of pre-IPO investments.
Now, delving into the content of the article, let's break down the key concepts:
Pre-IPO Shares:
Pre-IPO shares are ownership stakes in privately held companies. Before a company goes public through an IPO or other means like a SPAC transaction or direct listing, its shares are privately traded. This includes companies on the verge of an IPO or startups with no defined path to going public.
Buyers of Pre-IPO Shares:
Various investors can participate in buying pre-IPO shares, including institutional investors such as private equity funds and venture capital funds, other companies seeking stakes in new ventures, individuals in friends and family rounds, participants in crowdfunding campaigns, and accredited investors using secondary marketplaces like Forge.
Accredited Investors:
To qualify as an accredited investor, individuals need to meet the SEC's financial requirements, such as having an annual income of $200,000 (or $300,000 joint) for the past two years, with an expectation of maintaining that income in the current year. Accredited investors can access pre-IPO stocks through secondary marketplaces.
Benefits of Buying Pre-IPO Stock:
- Early Access Opportunities: Investors can get in early before a company goes public, potentially reaping significant rewards if the company grows.
- Potential for Outsized Returns: Pre-IPO investments offer the chance for substantial returns, even if a company is already well-known or has reached unicorn status.
- Diversification: Investing in pre-IPO shares allows for diversification, treating the private market as a separate asset class.
Risks of Buying Pre-IPO Stocks:
- Less Liquidity: Trading pre-IPO shares can be less liquid, taking more time than publicly traded stocks and impacting transparency.
- More Red Tape: Regulatory compliance and company trading rules, including IPO lockup periods, add complexity to pre-IPO investments.
- Potential Loss of Investment: As with any investment, there's a risk of significant decrease or total loss.
About the Author:
Jake Safane, the article's author, specializes in financial reporting and has contributed to renowned publications. It's important to note that he received compensation from Forge Global, Inc. for writing the article.
Legal Notices & Disclosures:
The article emphasizes that the information provided is for informational purposes only and doesn't constitute an offer to sell securities. Forge Global, Inc. and its affiliates do not provide investment advice, and investing in private company securities is highly speculative and not suitable for all investors.
In conclusion, the article provides a comprehensive guide for potential investors interested in navigating the complexities of pre-IPO stocks, offering insights into both the opportunities and risks involved.
