What Is a Pre-IPO Stock?
By TOI Staff November 25, 2022 Update on : November 25, 2022
A pre-IPO stock is a type of security that can be bought before a company’s initial public offering (IPO). Venture capital firms and early-stage companies often issue pre-IPO stocks to raise money to get their business off the ground. Scroll down if you want to learn more about buy pre-IPO stock.
What Is a Pre-IPO Stock?
A pre-IPO stock is a security issued by a private company before it goes public. It’s called a pre-IPO because the company isn’t required to follow the same disclosure rules as a public company, which means that investors might only know some of its operations.
A pre-IPO investor purchases shares in addition to those offered during an initial public offering (IPO) when they become available on the open market. The price of these stocks tends to be higher than that of IPOs, since fewer shares are available, and investors are more willing to pay more for them.
Private Companies and Private Securities
Private companies can sell securities to investors.
These are not traded on public exchanges; the process is known as a private placement. This can be done in two ways: either through an accredited investor or a non-accredited investor.
Accredited investors generally have a net worth of at least $1 million and/or have earned income for the last two years that exceeds $200,000 individually or $300,000 jointly with their spouse (or, if married, file taxes separately from your spouse). Non-accredited investors do not meet these requirements and must go through crowdfunding sites such as AngelList or Crowdfunding Hub.
IPO vs. Pre-IPO Stocks
When you invest in a pre-IPO stock, you’re buying shares of a company that has yet to go public. The best way to think about this is like this: if an IPO is when a company first offers its stock to the public, then pre-IPOs are those same companies before they do so.
You might be wondering what all the fuss is about—why would anyone want to buy stocks at such an early stage? So it makes sense if you think about it. But, as we mentioned above, there are many risks involved with investing in any startup business (even successful ones), but it also means that there could be big rewards if things go well!
Risks of Investing in a Pre-IPO Company
Investing in a pre-IPO company comes with risks. The main risk of investing in a pre-IPO company, as opposed to an IPO, is that their valuation is much more challenging to determine. A lot of the time, there are no hard numbers on how the company performs and its profit margins—this makes it harder for investors to determine whether or not they want to buy shares of stock at that price point. Additionally, additional risks may be associated with purchasing private securities (i.e., stocks) instead of public securities (i.e., stocks).
According to SoFi, “An indication of interest is similar to making a reservation – you are holding your place in line and will be contacted by SoFi to confirm your intent once the deal is live and firm orders can be received.”
Investing in pre-IPO stocks is risky, as you are investing in companies that have not yet gone public. However, there are some big benefits to doing so as well. If you do decide to invest in a pre-IPO company, keep your eyes open for news of an upcoming IPO or acquisition.