Pre-initial public offering (Pre-IPO) investing means buying shares of a growing company before its initial public offering (IPO) on the New York Stock Exchange (NYSE) or Nasdaq. Anyone with basic access to technology can buy common shares in the stock market. Pre-IPO investing is more complicated. There are federal rules about who can invest pre-IPO. You may also need to get approval from the company’s board of directors, who have the right of first refusal (ROFR). Pre-IPO investing has some distinct challenges and risks, but the potential rewards are beyond exciting.
Imagine if you could turn back the clock to 1980 and invest just $1,000 in Apple, Inc. (AAPL) at the time of the company’s IPO. By the end of 2019, your investment would be worth $680,000. Apple’s pre-IPO investors made even more money. The first angel investor, Mike Marrkula, invested $250,000 into the company in 1977. He obtained ownership of 30% of the company in exchange for his investment. Apple went public in December of 1980, and Markula’s investment was suddenly worth $203 million.
Firms like The Spaventa Group make it possible for investors to access shares in pre-IPO companies while offering current shareholders in private companies the opportunity to sell their shares for cash. Buying pre-IPO stocks means that you can beat the crowd and own stock in a company that may be the next Apple. Pre-IPO stock may be offered at a discount, further increasing your potential rewards.
When a stock goes public, it may make significant gains on the first day. For example, Alibaba’s share prices jumped 36.3% over its offering price. With pre-IPO investing, there’s potential for a giant upside.
Fintech companies receive a lot of well-deserved attention from accredited investors curious about technology startups.
Plaid is a payment services company with a mission to democratize financial services with technology. The global pandemic created an acute and widespread need for safe and contactless payment methods, and Plaid stepped up. The company connects bank accounts to payment apps with technology that makes transactions faster and safer for consumers.
Investors considering buying pre-IPO shares of Plaid have high hopes for the up-and-coming fintech company valued at $13.4 billion. After walking away from a potential merger with Visa due to allegations of the partnership violating antitrust laws, Plaid raised $425 million in funding. The company plans to increase its number of employees by 50% during 2021.
Klarna is another fintech company that got a boost from increased online shopping during the pandemic. The company, founded in Sweden, is now one of the world’s biggest buy now pay later technology solutions.
Users can choose to pay off their purchases within 30 days or pay in four installments; both options are interest-free. Klarna also offers financing for six to 36 months. There’s no maximum purchase size, and a customer’s credit limit depends on how many times they’ve successfully used the service in the past and the size of the purchase.
Klarna raised $639 million and now has a post-money valuation of $45.6 billion, which is a 47.3% increase over its March valuation of $31 billion. The 16-year-old company is now Europe’s highest-valued private fintech. Nearly $7 billion of purchases were made through Klarna in March of 2021, and the company recently expanded into France and New Zealand.
Privately-held companies make shares available for trading to raise capital. Investors who own shares in the company can cash out after the lockup period, which typically lasts between 90 and 180 days from the IPO. Employees who own stock in the company may also be able to sell their shares on the open market after the IPO.
The private market is a secondary market similar to the NYSE. Shareholders can sell their stake in a company to outside investors in exchange for cash. With the private market, accredited investors can access companies that are not yet publicly traded.
In most cases, you must be an accredited investor to buy pre-IPO stock. About 10.6% of households in the United States were accredited as of 2020.
The U.S. Securities and Exchange Commission (SEC) changed the criteria for institutional investors on December 9, 2020. An accredited investor must meet one of the following criteria:
When you buy from private companies you can buy common or preferred shares. The common shareholders can easily get diluted in private companies.
Accredited investors who choose to diversify their portfolio by buying pre-IPO stocks may wait years (or even decades) for a liquidity event. They may choose not to sell, and some companies decide not to go public, even if they can.
If you decide to buy shares of a company pre-IPO do so after you have a solid understanding of the risks. There is less liquidity and higher risk in the private market. Read the investor offering memorandum.
Talk with your accountant to understand any potential tax consequences. Your accountant won’t give you investment advice, but they’ll tell you the tax consequences of your potential pre-IPO investment. If you are considering adding pre-IPO stock to your retirement account, they can walk you through the logistics.
Ready to learn more about how to get in on pre-IPO investments? Call, email, or fill out our information form to get access to TSG’s opportunities in the private market.