Pre IPO Insights
pre ipo placement

10 June 2022

Pre IPO Placement Definition and Example

During their pre IPO placement stage, purchasing shares in startups is a time-tested method of earning a great return on investment. Pre-IPO investments have legitimate risks, but if you are willing to risk a certain amount of money in exchange for potential rewards, they are worth investing in.

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What is Pre IPO Placement?

A pre-IPO private placement involves auctioning a company’s unregistered shares before being listed on a public exchange. Companies usually auction these shares to mutual funds, hedge funds, venture capital firms, private equity firms, and institutional investors that can buy them in large quantities.

Individual retail investors can also participate in pre IPO investing. Investing in pre-IPO stock or initial public offerings can be profitable if an organization’s public offering meets or surpasses market expectations. However, it’s also risky because nobody can predict a stock’s future performance.

Investors participating in a Pre-IPO placement process are subject to a lockup for a specific period of time, meaning the investors can’t trade the shares immediately after the company goes public. 

· How does a Pre IPO Placement Work?

In a pre IPO placement, companies issue unregistered securities, which can only be issued to accredited investors. An accredited investor can be:

  • An individual investor whose income surpasses $200,000 or $300,000 for couples
  • An institution whose investments surpass $5 million
  • An entity whose assets surpass $5 million
  • An individual with a series 82, 65, or 7 in good standing
  • A person whose net worth is $1 million either as an individual or as a couple
  • An organization where all equity owners are accreditors

The shares a company sells during a pre-IPO placement are not the same as those investors purchase in a traditional stock exchange. In this case, the company is not obligated to register the shares with the Securities and Exchange Commission (SEC). Further, they don’t have to file the disclosures required by the SEC from publicly traded firms.

· What does Pre IPO Placement mean for Individual Investors?

 Pre-IPO Placement mean

Many individual investors don’t qualify to take part in a pre IPO placement. Unless you are an accredited investor, you need to exercise caution should a company approach you regarding a pre IPO investment. Remember, there are numerous scams where firms offer individual investors pre IPO shares. Further, it’s illegal for companies to sell unregistered shares to non-accredited investors.

Accredited investors who get a chance to invest in pre IPO shares should also do their due diligence before risking their money. Establish information about the company, such as what the firm deals with, the firm or individual underwriting the Pre IPO offering, the broker-dealers, and its management team.

Is Buying pre IPO a Good Idea?

Buying pre-IPO a Good Idea

Pre-IPO companies are organizations that are yet to register their initial public offering (IPO) to sell their company shares on the stock market. Investing in these firms can be profitable to accredited investors. Here are reasons why buying pre IPO shares can be an excellent idea. 

· Pre-IPO Firms have Robust Business Models

Usually, pre-IPO companies will have been in the industry for a few years and demonstrated their potential to make money even with little valuation. This shows that their business model is sustainable. When an organization goes public, its valuation soars, forcing it to compete with its larger counterparts in the industry. Pre IPO firms don’t struggle with such challenges, explaining why you can invest at discounted prices.

· Pre-IPO Firms have Comprehensive Plans

Investors can access more extensive information about pre IPO firms than they would with post-IPO companies. Often, these startups focus on developing comprehensive business plans to attract potential private investors. Private companies prioritize success over failure, meaning investors can expect excellent quality products and high operational standards. 

· Pre-IPO Stocks Provide Great Value for Investment

Buying pre-IPO shares enable you to own a company at a reduced cost, earning a high return on your investment and encountering lower volatility. While many companies quote a lower IPO price to attract pre-IPO investors, capital markets usually correct post-IPO firms, resulting in massive losses sometimes. Post-IPO corrections are common, explaining why financial experts recommend purchasing shares in the primary market instead of the secondary one.

Whether you are an investor or an aspiring one, accessing private funds early allows you to identify valuable trends and position yourself with priceless investment opportunities. Buying stocks on the primary market doesn’t expose you to corrections because markets hardly fluctuate when listed on the secondary market following the listing date. That allows you to control your holdings and decide the companies you want to invest in.

Pre-IPO stocks are often reserved for high net worth individuals (HNIs) who invest over $500,000. HNIs usually know pre IPO companies before their public launch, enabling them to buy the stocks first instead of doing so at a late stage. Pre-IPOs give you a broader choice of stocks and attractive returns. Investors are highly likely to receive high returns on small investments.

Which is Better, IPO or Private Placement?

IPO or Private Placement

Private companies seeking to raise capital via the issuance of securities can do so through a private placement or by offering shares to the public. Publicly traded shares are subject to more regulations than those in private placements. Let’s discuss each option to determine which among them is the best.


An IPO is regulated by the Securities and Exchange Commission (SEC). It requires regular financial reporting to remain accessible by investors for trade. During an IPO, the issuer relies on an underwriting firm to determine the security type to issue, the total shares to be issued, the ideal offering price, and the right time to make it available.

IPOs can be risky for investors because they don’t have a previous market activity that investors can assess. As a result, examining the IPO prospectus report and doing your due diligence about the company is critical before investing.

IPOs became favorable for small businesses following the Jumpstart Our Business Startups Act, created to promote hiring and reduce the substantial financial reporting strain on small businesses when filing for an initial public offering. 

· Private Placement

As we have seen above, private placements are offerings issued for sale to accredited investors only like pensions, investment banks, or mutual funds. Some high-net-worth individuals can also buy shares via private placements.

Institutions using private placements usually pursue a small capital amount from a few investors. If released under Regulation D, these securities are excluded from numerous financial reporting demands of public offerings, which saves the issuing firm money and time.

Private placement issuers can sell intricate security to accredited investors who are conversant with the potential rewards and risks. This enables the company to remain privately owned while eliminating the need to list annual disclosures with regulatory bodies.

Marketing an issue can be more difficult for private placements because they can be risky with lower liquidity than their publicly traded counterparts. Private placements can be executed faster than initial public offerings. Companies that value their position in the private company industry don’t have to compromise their privacy to gain capital or liquidity from the pre-IPO. 

What is the Difference between IPO and Placement?

  • An IPO involves releasing the shares of a private firm to the public in a new stock issuance. On the other hand, a private placement is a fundraising strategy where shares are sold to pre-chosen institutions and investors as opposed to an open market.
  • In an IPO, a company avails its shares via a public offering. In private placement, an organization’s shares are unavailable to the general public.
  • In an IPO, shares are available to the general public. Interested parties can buy them in a public offering from the stock exchange. 
  • While IPOs are highly regulated, private placements are not.
  • SEC enrolment is mandatory for public offerings, while private placements don’t require it. 
  • Often, companies choose IPOs because they want to attract a wider pool of investors. Companies that opt for private placement do so because they have envisioned a potential opportunity for fast growth, which requires capital. 
  • Companies also prefer IPOs to attract a wider pool of retail investors or institutions. Firms that choose private placement do so to attract a considerable number of retail and institutional investors. 

An Example of Pre IPO Placement

The popularity of pre-IPO placement has grown in the last few years, with many companies choosing them over IPOs. Some firms that have issued pre-IPO stock include Alibaba and Uber. Both companies have links to e-Commerce. For instance, PayPal bought $500 million worth of Uber’s value of its common stock before its IPO. 

Alibaba’s pre-IPO issuance stood out because one portfolio manager and an investor bought a large block of shares. Ozi Amanat, a venture capitalist, based in Singapore, bought a $35 million value of pre-IPO shares at a $60 share price per stock. He later distributed the shares among various groups of families.

At the end of Alibaba’s inaugural public trading day, its shares had hit $90 each. The company’s IPO would deliver more than 40% return to the pre-IPO shareholders following a higher than envisioned demand for its stock. Before its IPO, Uber’s value was over $60 billion.

On the other hand, Grab Taxi began with only $7 million in funding. If investors participated in Uber’s pre-IPO before it became a publicly-traded firm, they would resell them for $7 million during the IPO. By investing in Pre-IPO companies, you can leverage promising opportunities such as what we have discussed without waiting for the IPO. IPO regulations are strict, while pre-IPO investments are exposed to less and sometimes no regulation.


A pre-IPO placement occurs when an organization releases unregistered securities before an IPO. These securities are available to accredited investors. Investors can purchase pre-IPO shares at highly discounted prices. However, they can result in risks for the investor. As an investor, you need to exercise caution before investing in a pre-IPO placement. Pre-IPO shares are unregistered, and investors are barred from reselling them to investors in the public market until months after the company goes public. 

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