IPO stocks have become highly popular, especially since the Silicon Valley has started to produce some of the best and most profitable startups as compared to anywhere on Earth. However, it can be a tantalizing prospect to buy a pre IPO stock. Think about Peter Theil and Sheryl Sandberg who had invested in Facebook before it even got listed on the NASDAQ in 2012. Or consider Bobby Murphy and Evan Spiegel who went public with Snapchat in 2017 and ended up raising $30 Billion.
Finding companies which are best in place of initial public offering could be something that could turn you into an overnight millionaire. It is risky and difficult to do so. It might not turn out to be successful or glamorous as you once thought it would be. Here is just what one needs to know about pre-IPO stocks.
What is a pre-IPO stock?
A pre-IPO stock provides investors with the opportunity to list on the stock market. Their goal is to buy in while the stock is privately-held and relatively small. Once, the shares get listed, the investors would sell the shares of the business in a large stock exchange such as the NASDAQ and end up making a fortune. The return on investment on pre-IPO stock is huge as long as you do your homework well.
Now, it can be hard to tell if a stock is pre-IPO until it gets listed and by that time it would have been too late already. There a two characteristics which can be found in such a company, namely a great story and the potential to grow exponentially. The following questions should be asked if you want to determine whether a business could someday actually go public.
• Would there be a demand for this type of investment?
• Could the company have thousands or even millions of customers?
• Is it possible for the business to become a billion dollar corporation?
• Does the company have a story which would make investors want to buy into it?
• Is the industry in which the business operates growing significantly?
• Could the company become an international corporation?
• Does the business offer a unique solution which could turn it into a Unicorn?
A few of the websites which you should check out to see if there are any shares being sold in the companies before they trade publicly. Examples of these websites include Seed Ups, Our Crowd, Equidate, Share Post, and Equity Zen.
Pre-IPO Stock Misconceptions and Risks
There are certain misconceptions that many aren’t aware of when it comes to pre-IPO stock. And, plenty of risks can also be found when we look at investing into it.
No. 1: Any Corporation Can Be Pre-IPO
Any company can be made into a pre-IPO stock with the help of a good promoter. He could easily entice investors with the prospect of investing in the stock before anyone does. Generally, the promoter isn’t wrong either as it would be to your advantage. Now, even the local corner store could become pre-IPO. However, that’s all there would be to it.
It is important for one to be cautious about companies that market themselves as pre-IPO. They could even be a scam.
No. 2: Listing on the Stock Market is Quite Easy
It has become quite easy to list a company on the stock market due to the lax laws in place. A small fee is just what would be needed in different parts of the world to allow for the public listing of the business. However, these markets are considered to be less liquid as compared to FTSE, ASX, TSX and NYSE.
Simply going public doesn’t mean that it would cash out. One needs to have a market for people to buy into their stock.
No. 3: IPOs Aren’t Necessarily Lucrative
Not all IPOs turn out to be a huge success, even if they end up listing on a huge market. No matter where the stock is listed, if there is no demand for it, people would just not buy the stock.
No 4: Until the IPO Shares Are Illiquid
Sometimes, it can be impossible to sell shares in a privately-held firm. One should be prepared to make a long term investment when investing in pre-IPO stock as the company might not go public as planned before and you might have your capital tied up for an extended period of time. It might sound unfair but it is the bitter truth about investing in pre-IPO stock.
No. 5: Regulatory Concerns
There are laws which are in place that govern if and how pre-IPO stocks are sold. One needs to have received a private placement memorandum or an offering in order to invest in it. A subscription agreement would also need to be signed. Or else, you would need to rely on certain exemptions from the securities act or be an accredited investor.
The most common violations of the securities act, is illegally raising money from investors. Any company that gets caught doing so would end up facing huge fines and the value of the investment would be threatened. Make sure that the company complies with the relevant laws before buying. Early issuers might be unaware of the law but it is no excuse.
No. 6: Unknown Characteristics of Shares
If you invest in a private business later on, the prior shareholders would have certain rights which you won’t. They could be entitled to receiving the earnings from IPO before you for example. Their votes could potentially carry more weight too. Yours shares might not get listed, while yours do. Ensure that you know what those prior to you were offered in order to know if you are at the back of the line or not.
No 7: Some Companies Only Go Public In Order to Survive
Sometimes, companies only go public as they have no other option to raise much needed cash. Therefore, in order to avoid a situation where your interests aren’t as protected as you thought they were, go through all of the financial statements to get an idea of the company’s performance and ask them about their reasons behind going public.