Pre IPO Insights
Investing in IPO Offerings

7 September 2022

Pre IPO Investing: An Opportunity for High-Growth Returns

If you’ve not come across the term IPO previously, it’s an acronym for initial public offering, and it represents an opportunity for people to make money from private companies. 

However, initial public offerings don’t have guaranteed results despite their popularity. You can buy IPO stock when it’s high following its debut, and after some time, it stagnates or starts to decline. Some stocks even crash completely, resulting in enormous losses for investors.

If you’re lucky, you can buy stocks, and they appreciate steadily over time. But you need to understand what IPOs are, how you can invest in them and check out several case studies to help you decide which newly listed stocks you should buy.

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Table of Contents

What Is an IPO (Initial Public Offering)?


An IPO is when a private company avails units of ownership to public markets. Basically, the company’s ownership is changing from private to public. As a result, an initial public offering is often referred to as ‘going public.’

The shift from private to public ownership can help a company’s investors realize profits from their investments and often includes a share premium for them. It’s also an opportunity for the public to capitalize and own shares while they’re still cheap in case their value increases.

IPOs are typically done by successful startups or businesses that have been around for many years. Companies use initial public offerings to fund expansions, endear themselves to the public, pay off debts and allow insiders to create liquidity.

Types of an IPO

Types of an IPO

Book Building Offering

In this IPO type, the company conducting an initial public offering offers investors a 20% price band on its shares. Investors are given a bidding period, after which the company settles on a final price of shares. 

Under book building, investors must indicate the number of shares they’re willing to buy and the price per share they’re willing to pay.

Unlike fixed price offerings, there is no set IPO stock price under book building. The least share price is known as the floor, while the highest is known as a cap. 

Fixed Price Offering

In this IPO type, the company going public determines the price at which shares will be sold to investors. These investors usually know the fixed price of shares pre-IPO. To participate in such an IPO, investors must pay the entire stock price during the application.

In addition to types of initial public offerings, there are other types of offerings that companies can make once they’re listed on a stock exchange. They include:

Follow-On Offering

This is when a company issues additional shares after an IPO. The downside of a follow-on offering is that it can dilute an investor’s ownership of a company because the company is effectively registering new shares. 

Secondary Offering

This is when a company avails shares to the public previously held by large investors. Unlike a follow-on offering, a secondary offering can’t dilute an investor’s company ownership because the shares were already issued during the IPO.

How Does an IPO Work?

How Does an IPO Work

Prior to an IPO, all companies are considered private entities. Why? Because before the IPO, companies typically have a small number of stakeholders such as founders, family members of the founders, as well as investors such as angel investors and VCs (venture capitalists).

When a company reaches a point in its growth process where stakeholders agree its capable of handling securities and exchange commission requirements and responsibility to public stakeholders, it can express an interest in solicitation. 

According to the below clip by the CFI (Corporate Finance Institute), the IPO process comprises five main steps namely selecting an underwriter, due diligence and regulatory filings, pricing, stabilization, and transition to market competition.

In the United States, the point of growth where companies typically go public is after reaching a valuation of over one billion dollars, also called the unicorn status. However, even if a company has a valuation under one billion dollars, they still qualify for an IPO so long as they have a profitability potential and meet the FDIC and SEC IPO eligibility requirements. 

When a company wants to go public, its shares are priced via underwriting due diligence. Previous private ownership becomes public ownership meaning the value of shares an investor held before the company went public is determined by the public trading price. Underwriting shares can also comprise unique private to public ownership provisions.

After the initial public offering, private shareholders can sell all their shares at a price typically higher than what they invested. If they think the company will continue growing, they can sell part of their stock and keep the rest. 

An IPO opens up a huge opportunity for anyone to subscribe to a company’s shares. Overall, the number of shares a company avails and the share price determines the new shareholders’ equity value. Shareholders’ equity is the amount private investors contribute to the business, whether public or private. However, once a company goes public, the shareholders’ equity grows substantially due to the cash injection during the IPO. 

An initial public offering is a massive step for any company because it offers them the opportunity to raise a lot of cash. The cash is used for growth, mainly hiring new talents, opening new premises and research and development.

What Is an IPO for?

What Is an IPO for

An IPO is an opportunity for the public to subscribe to the shares of any newly listed company. However, one of the main reasons private companies conduct IPOs is to allow early investors to cash in on their prior investments. 

Think of going public as the end of one phase of a company and the commencement of another because the earliest investors want to sell their stakes and invest in other private companies. On the other hand, most established private companies conducting IPOs may want the opportunity to trade some or all of their shares. 

Other reasons why private companies conduct IPOs include:

  1. To raise additional capital to repay debts and promote growth endeavours such as hiring new talents, building new premises and funding research and development.
  2. It helps private companies endear themselves to the public
  3. Private companies might want the status often afforded to public companies, which can help them secure loans at more favourable rates. 

Conducting an IPO makes it cheaper and easier for companies to raise capital, but it has its complications. For instance, there are requirements such as filing returns quarterly and publicizing annual financial performance. Public companies are answerable to stakeholders for actions such as acquisitions, mergers and selling significant assets.

Participating in an IPO

Participating in an IPO

When participating in an initial public offering, there are several things investors should know, such as the name of the offering, type of offering, IPO category, price band, etc.

The name of the offering is the company conducting the initial public offering. Investors can get the titles by searching S-1 forms filed with the SEC. The type of offering is the type of IPO being conducted book building or fixed. 

With regard to the IPO category, there are three types institutional, non-institutional and retail investors. The price band is the price range arrived at by book building. The principal underwriter sets the offering price as well as an issue based on several factors, such as the amount of interest shown by potential investors during the IPO.

Prior to investing in an IPO, investors first need to determine if their broker-dealer provides access to a brokerage account for a new issue of shares and, if so, what the eligibility requirements are. Usually, those who qualify are very wealthy people and seasoned traders who comprehend the risks of participating in IPOs. Individual investors can have a hard time subscribing to shares during an IPO because the demand often exceeds the supply. 

Due to the limited number of available shares in an IPO, most brokerage firms limit the number of people who can partake in initial public offerings by requiring clients to hold a substantial amount of ownership in the firm. This helps clients to maintain a long-term relationship with their broker-dealer and meet specific trading frequency requirements. 

Assuming you’re an investor, you’ve done your research and been allotted a specific number of shares during the IPO; it’s vital that you understand that you’re free to sell the shares you’ve been allotted, but your brokerage firm can limit you from participating in future IPOs because you’ve sold the shares allotted to you within the first several trading days. Selling IPO shares allotted to you quickly is known as flipping, and most brokerage firms discourage it.

Keep in mind that there is no guarantee that a specific company’s stock will continue to trade at or above its IPO price once listed on the stock exchange. That said, most people invest in a company’s shares during its IPO to give them a head start so that when the share price increases, they will benefit as well. 

Investing in a newly listed company can be very rewarding, but there is no guarantee that you will generate profits due to the associated risks. IPO shares have a lower risk tolerance than their more established counterparts because they don’t have a performance track record or a history of publicized financial reports that can be evaluated. Therefore, if you’re new to initial public offerings, do your research before making a pledge with your hard-earned cash.

What Should You Consider in an IPO?

What Should You Consider in an IPO

Some of the things you should consider when deciding whether or not to invest in the shares of a company going public include:

Dual-Class Common Stock

Dual-Class Common Stock

An increase in the number of private companies conducting IPOs has resulted in the creation of distinct classes of common stock, with some classes having more power than those offered in the IPO. This structure of dual-class common stock is often used by companies that will continue to be governed by their founders or are family-owned. The superior common stock will be allotted to the company founders or controlling family. 

With such a framework, the holders of the superior common stock have a much higher percentage of the company voting rights than their stakes would otherwise offer and control the company without owning a majority of its stock. However, the superior common stock becomes typical common stock when sold by its initial holder. 

While a lot of successful companies have a dual-class common stock framework, you should know that such as framework will make it harder, if not impossible, for you to have any influence on critical decisions made by the company. 

Therefore, when investing in newly listed companies, confirm whether the company has a dual-class common stock framework and the rights various shareholders have. This information can be found in a preliminary prospectus section titled ‘Description of Capital Stock.’

Limited Trading Volume

Limited Trading Volume

The trading price of shares can be affected if there is a scarce supply of shares following an IPO. The shares traded on the initial day are typically the only shares sold during the IPO. All other outstanding shares, such as those held by founders, angel investors, staff members, mutual funds, etc. and haven’t been registered for sale during the IPO, can’t be sold either because the existing shareholders had entered into a pact known as the lock-up period with the underwriter or because they’re ‘restricted shares’ under the federal government security laws that state they can’t be resold without being registered.

Market Overhang

Market Overhang

The number of shares remaining that can’t be traded during the IPO are sometimes called ‘market overhang.’ The price of shares can decline over time following an IPO as the previously barred shares become eligible for sale. 

Moreover, when the lock-up period lapses, the share price can drop substantially if many shares become available for sale immediately. A company’s early and private investors often see the IPO as an exit strategy, selling shares to the public at an inflated price. As a result, you might not get friendly prices before or after the lock-up period lapses.

Selling Shareholders

The people who invested in the company before it went public can decide to sell or all of their shares during the IPO if their shares are registered as part of the IPO. However, most large IPOs only comprise new issue of shares a company sells to raise capital. But in some instances, shares held by existing shareholders can be included in the IPO; from this point, these shareholders are known as ‘selling shareholders.’ The money from selling these shares doesn’t benefit the company because it goes directly to the selling shareholders. 

The cover page of the prospectus lays down the number of shares being sold by existing shareholders if any. The private company conducting an IPO will also reveal the percentage of the company each selling shareholder currently owns and the number of shares they want to sell and want to retain following the IPO under ‘Principal and Selling Shareholders.’

Companies must disclose any management position, office or any other relationship each selling shareholder has with the company during the past 36 months. So it’s vital that you determine the relationship between the company and the selling shareholders and the number of shares they want to sell to make an investment decision.

The Offering Price

The Offering Price

The shares issuer and their underwriters decide what the offer price should be. The aspects they consider when setting the price and the terms of the underwriting pact between the company and the underwriters are laid down in the prospectus.

This information is under the ‘Plan of Distribution’ or ‘Underwriting’ title. It’s essential to comprehend that the offer price is determined by a combination of market analysis, conditions and negotiation. Opposing interests affect the result of the offering price.

From the standpoint of the private company going public, the higher the offering price, the more money they can raise from the IPO. The company’s underwriter also benefits if the offering price is high because not only does it help their client meet their objectives, their earnings are typically a portion of the offering price. 

Consequently, the underwriters are responsible for promoting the IPO and will want an offering price attractive to the investors to whom they will be selling. Under-pricing an initial public offering offers initial investors a discount, boosts the demand for the IPO and helps the underwriter with the allocation all of the available shares. Under-pricing can also affect whether or not the price of the stock shoots up on its first trading day. 

If there is a substantial increase or ‘bump’ from the offering price during the first day of trading, the company going public, and its primary investors will be satisfied because the value of their investments will have grown. However, the issuer can also feel dissatisfied because it might have to sell its shares at a higher offering price to raise more cash. 

Whether you want to directly partake in an IPO or buy stock in the open market, it’s vital to understand that the offering price mirrors an estimate with regard to the company’s value. The offering price may have a trivial relationship to the trading price of the shares, and it’s not rare for the closing price to be significantly above or below the offering price after the IPO.

How to Invest in an IPO and Generate Profits

If you decide to invest in the shares of a company when it goes public, there are a couple of things that you should try your level best to do:

Be Cautious

Be Cautious

Scepticism is an attribute you should have when it comes to the IPO market. Why? Because IPOs are engulfed by a lot of uncertainty, mainly due to a lack of information on private companies. As a result, you should approach them attentively.

This is especially the case when your broker recommends a certain IPO because it means that an investment bank, the most seasoned traders, and high net worth individuals have foregone the underwriter’s attempts to sell them these stocks.

In such an instance, you’re likely getting the leftovers the ‘big guns’ didn’t want. If your broker constantly pushes you towards a specific initial public offering, it’s probably because there is a high number of shares available. Even if you’re focus is on the long-term, finding a good IPO is hard because they have many risks that differentiate them from typical stocks.

Conduct A Thorough Research

Conduct A Thorough Research

Getting information on companies that want to go public is difficult. Why? Because, unlike most public companies, private ones don’t have a host of financial analysts evaluating their performance or trying to reveal struggles among the top brass.

Most private companies attempting to go public try and disclose all their information in their prospectus. However, you should consider this biased information because it isn’t audited by a third party. What’s the solution? The solution is to conduct thorough research on the private company, including its financial situation, past press releases, competition and the health of the industry the company is competing in. 

Although finding reputable information is hard, learning as much as possible about a company you’re about to invest in is essential. Why? Because your research can help you unearth inconsistencies in the company’s preliminary prospectus. If what you uncover is damning enough, then you will most likely decide not to invest in the company’s IPO shares.

Consider The State of the Economy

This is a significant factor when determining whether or not you will partake in an initial public offering. Sometimes it can be better to wait for the hostile moments to pass, giving you the chance to purchase stocks at more favourable prices.

Consider Waiting for the Lock-Up Period to End

Consider Waiting for the Lock-Up Period to End

A lock-up period is a legally binding pact lasting between three and twenty-four months. It’s a pact between the underwriter and company insiders that bars them from selling any units of ownership for a specified period. 

Theoretically, waiting until company insiders are allowed to sell their shares is a good strategy because if they hold onto most of their shares once the lock-up period lapses, it might indicate that the company has a promising and sustainable future. 

In the course of the lock-up period, there is no way to tell whether the company insiders want to sell or hold onto their stock. So, let things take their course before you make an investment. A good company will remain a worthy investment even after the lock-up period ends.

Develop an Investment Strategy as Per Your Characteristics and Risk Profile

If you will trade in the short term and medium term, it’s recommended that you be aggressive and draw earnings when you get gains between 100% and 200%. This is a common practice among institutional investors that invest in IPOs.

On the other hand, if you’re trading long-term, your investment will produce earnings in the first couple of weeks or months. After this period, you might be tempted to sell your stock, but you shouldn’t unless there is a significant change in the stock’s trend.

Keep in mind that the stock market moves in phases of optimism and pessimism, if your stock value starts to plunge, you may consider selling it at a profit and buying back a more significant amount of stock at a significantly lower price if there is potential for the stock to recover.

Manage Your Capital Fiscally

Manage Your Capital Fiscally

Managing your capital fiscally means you shouldn’t commit a substantial proportion of your capital to one initial public offering. You should have a significant margin in reserve to be able to withstand hostile market movements.

If you want to partake in an IPO, you should consider the maximum loss you can handle not to compromise your long-term capital. This isn’t easy, but you should do it regardless to manage your risk. If in an IPO, the odds are against you early on, take a slight loss and reassess the stock when its price stabilizes.

Pick A Company That’s Using an Established Brokerage Firm

Picking a soon-to-be listed company with an established brokerage firm is essential. That’s not to say that established brokerage firms don’t have their issues, but you’ll find that they’re legit more often than not. It’s vital that you’re cautious when dealing with companies that have smaller brokerage firms because they tend to underwrite just about any company.

For instance, wall street banks like Credit Suisse, Goldman Sachs and JP Morgan Chase can afford to be picky with regard to companies they underwrite compared to relatively unknown underwriters. Therefore, you can bet on them as underwriters. 

On the other hand, there is a benefit to dealing with small brokerage firms; they make it easier for you to buy pre-listed shares, albeit this can be a red flag as well. Keep in mind that most established brokerage firms like the ones listed above won’t allow your first stock exchange investment to be an initial public offering. Typically, the only individual investors allowed to buy pre-listed shares are seasoned traders and very wealthy individuals.

Study The Prospectus Carefully

As illustrated above, you shouldn’t rely on the prospectus as your only source of information regarding a company conducting an IPO. However, you shouldn’t skip reading the prospectus; ensure you study it carefully. 

Where do you get it? A company’s prospectus is with its underwriter so that you can request it from them. Although the prospectus might be shallow, it indicates the company’s risks and opportunities as well as the proposed use of the cash raised by going public.

For instance, if the money collected will be used to repay substantial debts or reimburse the founders and angel investors, it might be a good idea to forego the IPO. This isn’t a promising sign because it means the company can’t manage to settle its debts without issuing stock. On the other hand, if the cash collected will be used to set up shop in new markets, hire new talents and finance research and development, you should invest in the company.

One of the biggest things to look out for when studying a company’s prospectus is a forecast of future earnings and net earnings. Over-promising and under-delivering are common problems among companies looking to make a name for themselves. Therefore, it’s essential that you carefully analyze the projected revenues and net earnings. 

Benefits of Investing in IPO Offerings

Benefits of Investing in IPO Offerings

Buy at Discounted Rates and Earn Big

The price per share you get during the IPO is often the lowest price you can get in a private company with the potential to develop massively. This is because that price is often discounted, and if you miss the chance to invest when the company is going public, it can be challenging to invest in the company because the stock will most likely skyrocket. 

For instance, when Amazon went public in 1997, the price per share was $18. If you had invested 5,000 dollars in Amazon in 1997 during its IPO, your shares would be worth a whopping $2.5 million by April 2018.   

Get in On the Action Early

Investing in IPO offerings allows you to access the ‘ground floor’ of a private company with high growth potential. When the company goes public, it can be your chance to profit in the short term and help you build wealth in the long term. For instance, if you invest in a new social media company and it gets many users, you will profit from that success.

Helps You Diversify Your Portfolio

Most of the time, people buy shares of companies that have been in the stock market for many years. However, investing in an IPO offering is a good chance for you to diversify your portfolio by investing in a company in its formative stages. 

Price Transparency

The price per share is clearly indicated in the IPO prospectus, which means you have access to the same information as large investors such as high net worth individuals and investment bank. This changes after the company goes public because the price per share is dependent on fluctuating market rates and the best price your broker can offer. 

Reach Long-Term Goals

IPO investments are equity investments meaning they have the potential to rake in massive profits in the long run. The yield you earn can help you fulfil your long-term financial objectives like building a home or retiring early.

Risks of Investing in IPO Offerings

Risks of Investing in IPO Offerings

After The First Day of Trading, The Shares May Plummet

While the first time trading pops of most IPOs are standard, it doesn’t mean the future works out well. Keep in mind that some of the best IPOs in recent times have lost their appeal to investors even after performing well in their initial days.

Even white-hot IPOs aren’t safe; for instance, Meta (Facebook), Uber and Twitter all plummeted substantially after they went public. Among these three companies, only Meta has managed to surpass its IPO price regularly. 

Investing in IPO Offerings is Expensive and Time-Consuming

The entire process of investing in an IPO requires a substantial amount of time and resources. For starters, the discounts offered during the IPO might not be that great, typically between 13% and 15% of the share price. Also, the cost of investing in IPOs is high because you’re required to buy a lot of shares which means you could lose a lot if the share price plummets. 

Private Companies Have Limited Operation Histories

Companies conducting IPOs are usually new, meaning they have limited operation histories, so it can be difficult to evaluate them and gauge their profitability potential.

Recent IPOs and What the Empirical Data Tells Us

Uber Technologies Inc.

Uber Technologies Inc

Uber conducted the largest IPO in US history on 10th May 2019, with a market capitalization of $120 billion. The price per share was set at $45.

Uber’s share price went below the IPO price, and coupled with the effects of the pandemic; it fell to $13.71. This represented a loss of close to 70% from the IPO price. This behavior can be attributed to Uber getting a lot of cash injections when it was private.

Investors who opened buying positions on the back of the government’s stimulus plans and the macroeconomic monetary policy acquired Uber shares for a price lower than the IPO price.

Uber’s stock price peaked at $64.05 in February 2021, a 42.3% increase from the IPO price, and then fell below the IPO price twice. The company’s business model has yet to inspire confidence among most investors. Uber’s stock volume is currently trading on low volume and in negative MACD (Moving average convergence divergence) territory.

Initial Public Offering Example

Meta (Facebook)


Facebook now Meta went public in 2012, and during this IPO period, the social media giant already had 500 existing shareholders and close to one billion monthly users.

The buzz around the social media giant raised investors’ expectations and pushed the price per share from an initial $28 to $35. Mark Zuckerberg, founder, and CEO, increased the number of shares available during the IPO by 25%. As a result, Facebook had 2.75 million shares available for sale and a market capitalization of a whopping $104 billion.

Promising IPOs to Look Out for in The Future

Bytedance (TikTok)


TikTok already has over 200 million users in the US alone and a preliminary valuation of over $50 billion. Speculation over when the company will conduct an IPO has been going around for the last couple of years. However, the company hasn’t set an actual date for its initial public offering, thanks in part to regulatory approvals. 

Speculation about the company’s potential IPO resurfaced in 2021 following the release of a Bloomberg article that laid out the social media giant’s plans. 

When the IPO happens, TikTok will most likely go public in two different locations in Hong Kong: Bytedance (the parent company) and the United States as TikTok. 

Why? Because under new rules for the company to operate in the US, it had to allow US companies Oracle and Walmart to acquire shares privately and hold board positions. This is part of the United States federal government crackdown on Chinese tech companies. Investing in TikTok’s IPO will be a smart move if and when it happens.



Chime is a rapidly growing fintech company with a noble business model. Chime offers online financial services to people without actual bank accounts as well as low-income persons. Chime has removed account minimums and overdraft fees hence its appeal.

The company aims to reach more people and enter a secondary market with this model. Currently, the company makes money via its Visa debit cards and earns interchange fees every time the debit card is used to pay for commodities or make a withdrawal. 

As noble as its business model is, Chime isn’t exempt from market forces hence why it’s expected to go public soon. Earlier reports indicate Chime had picked Goldman Sachs as its IPO’s underwriter. But talks of an IPO have gone down thanks to market volatility, but when the market improves, Chime is expected to go public as soon as possible.



Discord is a social media application that offers its users free messaging and access to audio and video conferencing solutions. The application is available in various ecosystems, including Android, iOS, macOS, Windows OS, as well as a web version.

In December 2021, Discord was named by US News as one of the IPOs to watch out for in 2022. However, this new social media giant is yet to confirm when it will go public, but signs in the first two quarters of the year indicate it might be soon. 

In March 2022, Bloomberg reported that Discord was cross-examining investment bankers in an attempt to go public, with the company reportedly leaning towards a direct listing. The company’s popularity surged between 2019 and 2021; it has a cult-like following and is primarily common among cryptocurrency enthusiasts and gamers. 

Discord is confident in its ability to continue developing; in fact, it turned down a $12 billion buyout by Microsoft in 2021. It seems to be working for them because, in 2022, the company is valued at over $15 billion, thanks to a cash injection of $500 million from investors. When the company goes public, investing early might be a good idea.



Starlink is a satellite internet company founded by perhaps the wealthiest person in the world, Elon Musk. Thanks to the satellites, Starlink can avail internet to the most remote locations on earth. The company has already placed over 1,000 satellites in space thanks to a collaboration with another company owned by Elon Musk, SpaceX. 

This massive project was announced by the company’s founder, Elon Musk, in 2015 and raised over $10 billion. Still, much more money is required because the company intends to have about 4,000 satellites orbiting the earth. 

As a result, Elon Musk indicated that an IPO is necessary, albeit this is dependent on the company’s performance. By 2021, Starlink was worth over $70 billion and expected new investments are valued at over $20 billion.



Another IPO to be on the lookout for is Stripe, a San Francisco-based digital payments company. In fact, it’s been dubbed the most anticipated IPO of 2022. Stripe’s e-commerce platform processes payments for tech behemoths like Google and Amazon. 

Currently, the company enjoys funding from various financial institutions and venture capitalists. In May 2021, the company conducted a round of funding that raised $600 million, bringing its valuation to roughly $95 billion. 

Stripe is often compared to another digital payment solutions company, PayPal, whose valuation is roughly $80 billion. When the company conducts an IPO, it will be a ‘hot property,’ so it’s best to invest early before stocks run out.


Can Anybody Invest in an IPO?

Most large brokerage firms will block your investment attempts in an IPO if you’re not a high-net-worth individual or an experienced trader. However, you can get a chance if a small broker promotes the IPO, albeit dealing with them is a risk.

What You Should Know About IPO

An IPO is mainly a move by private companies to raise capital by floating their shares to the open market for the public to buy.

What Are the Eligibility Requirements to Trade IPOs?

Those who qualify are high net worth individuals and experienced traders who comprehend the risks of participating in IPOs. Individual investors can have a hard time subscribing to shares during an IPO because the demand often exceeds the supply.

What Is the Account Funding Process for IPOs?

Persons who qualify to invest in IPOs can fund their accounts via wire transfer, making the funds available immediately. Electronic funds can be used to buy IPO shares 72 hours following the deposit settlement date.

How Long Before I Can Sell an IPO Stock?

Most IPOs have a lock-up period to prevent shareholders from selling shares quickly. The lock-up period is usually between 90 and 180 days.

Who Can Participate in an IPO?

Those who can participate in an IPO include high-net-worth individuals and experienced traders. IPOs are also open to institutional investors such as endowment funds, hedge funds, insurance companies, mutual funds, pensions, etc.

What Is an Investor Profile?

An investor profile is a reflection of an investor’s goals. It lays down the risk an investor is willing to accept and the types of returns they expect. Based on their profile, investors can get recommendations from a financial advisor on where to invest their cash.

Do Stocks Typically Go Up After IPO?

Yes, most stocks tend to shoot by between 15% and 30% after the IPO because the stocks are not being sold. However, most plummet after about six months.

How Much Should I Invest in an IPO

The amount you should invest in an IPO depends on your investor profile. So it’s something to discuss with your advisor to agree on the amount of risk you’re willing to take.

Is Buying Stock at Every IPO A Profitable Strategy?

Not really, because in a given year, many companies go public, and not all have successful IPOs. Therefore, if you don’t do your due diligence, you can lose a lot of cash.

The Basics of Pre IPO Investing

Private companies sell pre-IPO shares to willing investors before a company’s IPO. Many companies that engage in pre-IPO stock exchanges leverage the Pre-IPO placement process. Hedge funds, institutional investors, investment banks, private equity firms, and some retail investors often buy these shares.

Why Private Companies Trade Pre IPO Stock

Usually, private companies sell Pre-IPO shares to investors and the secondary market due to:

Raise Finances

Raise Finances Private companies can raise finances through a Pre IPO placement before the company finally goes public. After a company goes public, various factors can affect its share price, barring the IPO from meeting its expectations. Suppose no investor purchases the shares; the Company will not raise its required funds. Pre IPO shares are not susceptible to market-oriented changes. In this case, the Company can trade large share blocks at a defined stock price and generate a specific amount of funds.

Benefit from Third-Party (Investors) Mentorship

Institutional investors like hedge funds and large investment organizations with unmatched expertise, resources, and tremendous experience often purchase the most pre-IPO shares. They can mentor the private Company’s management, enable them to make informed decisions, and make the process of evolving from a private to a public company smooth. The insights and recommendations experienced investors offer are invaluable, especially for startups.

Can an Individual Investor Buy Pre-IPO Shares?

Investing in pre IPO can be a problematic task marred by numerous risks. Institutional investors usually purchase a significant percentage of pre IPO shares, offered in considerable chunks. While individual investors can still engage in a pre IPO investment drive, numerous restrictions may discourage them from pursuing it further. These are:

Lock-In Duration

Pre-IPO shares come with lock-in duration where early investors are restricted from trading or selling them. This duration ensures the investors do not dispose of the shares shortly after the initial public offering.

Credentials Requirements

Credentials Requirements In many countries, investors will need to meet laid down criteria before buying pre-IPO shares. For example, a private company will want to determine the investor’s net worth or income level. Investors will also need to provide tangible proof to show that they meet the laid down criteria. The Securities and Exchange Commission’s (SEC) regulations in the US restrict a significant percentage of pre-IPOs to accredited investors. These investors must have a considerable and stable income and proven experience with the investment markets. The SEC revised the accredited investor’s criteria in recent years, allowing more potential investors to invest in private offerings.

Should I Consider Pre IPO Investing? 

Investing in Pre IPOs comes with various advantages, as we shall see below. If you have the resources and a suitable risk profile, it is an investment opportunity you should not miss.

An Opportunity to Grow Your Returns

Many experienced investors opt to invest in Pre-IPO to grow their revenue exponentially. However, to enjoy profits, you have to invest in a suitable company at the appropriate time. Some of the most successful Pre-IPO companies include the Alibaba Group and Amazon. Before its initial public offering, the Company traded pre IPO shares to investment organizations and high net level investors at overly minimal prices of less than $60 each share. Ozi Amanat, a venture capitalist based in Singapore, is one of the investors who purchased the shares. Alibaba, an e-commerce giant, would later go public in one of the most extensive international initial public offerings ever. Its share price hit $90 on the first day, which saw investors earn a 50% ROI within a few months. Another company that had a successful IPO despite the pandemic is Robinhood.

Investors can Purchase Pre IPO Shares at Reduced Prices

Just like any other form of investment, pre IPO investing is unpredictable. Investors have no way of predicting the Company’s performance after going public. To counter that risk, many private companies offer pre-IPO shares at highly discounted prices. For example, assuming a company’s planned initial public offering price is $20, the pre-IPO share price could be $10 each. That way, should the share price drop from $20 to $15 due to various factors, investors that bought shares at the IPO will suffer losses. However, pre-IPO investors will make a small profit margin.

An Opportunity to Generate Long-Term Revenue

By investing in a pre-IPO, you are banking on a company with a robust foundation. Should it perform well, you can earn tremendous benefits from the grown on a long-term basis. Often, small startups transform into successful companies after going public. Investing in a company at its early stage can earn you great returns, in the long run, allowing you to accumulate long-term revenue.

What are some of the Risks of Investing in Pre IPOs? 

Investors should beware of the following risks before purchasing pre-IPO shares.

Low Return Risks

Low Return Risks Low returns are some of the most significant risks of investing in a pre-IPO. Investors have no guarantee that the stock price performance will be attractive. What happens when the initial public offering fails? What if the company stock lacks demand? In this case, investors may not get the returns they anticipated for. Remember, when the Company you have invested in doesn’t perform well, the shares will lose value, and you could lose your entire investment.

There is no guarantee that the Company will go Public

When you participate in a pre-IPO, you expect the firm to launch its IPO as soon as possible. However, you have no way of verifying whether the company will go public or even gauging its risk tolerance levels. Sometimes IPOs are halted, postponed, and even canceled when you least expect it.

Inadequate Financial Information

Often, pre-IPO investors may not get sufficient data to help them make informed decisions. The law requires publicly traded firms to reveal their financial standing to the public, but private companies are not. Such a situation causes information imbalance where the management of the private company knows its financial information, but pre-IPO investors don’t.

Can Individuals Invest in Pre IPO?

Unlike in the past when pre IPOs were only available in large blocks to highly profitable firms like SpaceX, individuals can now invest through pooled investments and brokerages. Always read the prospectus before investing in a pre IPO. Individuals Invest in Pre-IPO Today, investors can work with brokerages smoothly thanks to FINRA, a body that seeks to protect investors by facilitating smooth operations between the two parties (broker and dealer). The Jobs Act was structured to encourage startup companies with less than $1billion to invest in pre-IPOs. Retail investors can participate in pre-IPOs by:

  • Raising funds through crowdfunding. Today, firms can raise money via regulation crowdfunding. Further, they have also been exempted from listing with the SEC after meeting some laid down conditions.
  • Expanding directive A. Today, the SEC permits firms to offer investors up to $50 million worth of shares annually without listing with the organization.

The Jobs Act triggered an equity crowdfunding explosion which hit over $438 million by 2020. Due to that, many crowdfunding equity platforms have become popular for non-authorized investors seeking to invest in rapidly growing startups in the early stage. Retail investors participate in pre IPO investing indirectly by purchasing shares from firms that invest in the growth-phase businesses. One of the famous companies, in this case, is Sutter Rock Capital. The venture capital organization is registered on Nasdaq, and it invests in firms a year or even two before their initial public offering. Their pre-IPO investments include Dropbox, Apple, and Spotify. Some firms allow investors to access the private market investment opportunities to access a diverse collection of venture-oriented late-stage private firms. Selecting the most suitable stocks and assessing the market conditions and investment valuation can be a difficult task. Worth noting is that the average investor will hardly counter inflation if they choose to invest individually. Investing in pre-IPO can be overly risky, with some studies suggesting that up to 90% of startups fail.

How do Firms Sell Pre IPOs?

Companies often sell pre-IPOs through one of the following methods.

Venture Capital Firms or Angel Investors

Venture capital firms utilize funds collected from investment organizations, pension funds, and large corporations to invest in small companies. Venture capitalists don’t invest using their own money. An angel is a verified investor who invests in small businesses using their own funds. Their net worth should be at least $1million with a minimum of $200,000 income annually to qualify as accredited investors. Angel investors can be friends and family or small business owners. Small business angels strive to assist startup founders in growing their business plans and earning profits. Angel investors have more reasonable terms compared to venture capitalists’ terms.

Pre-IPO Placements

Pre-IPO placements take place when a private company’s underwriters offer stocks at reduced prices to designated investors before an initial public offering.

Stock Options

Often, stock options are given to employees who may want to resell their shares while adhering to the laid down regulations.

Can an Investor Dispose of their Pre-IPO Shares?

Many firms restrict the selling of pre-IPOs on secondary markets. If you have invested in a private company’s pre-IPO, waiting for the initial public offering could be longer than expected. Often, you may start wondering whether or not to dispose of the pre-IPO shares and earn some money instead. Investor Dispose of their Pre-IPO Shares Pre IPO shareholders can list their shares in secondary markets where interested parties can purchase them. Selling on the secondary market can be an ideal strategy if you need funds immediately. However, there are various disadvantages of selling. You surrender any interests in your shares by selling your shares on the secondary market, and you may have to pay high tax amounts. Instead of selling their shares, startup employees can opt for non-recourse financing, especially if they want to leverage other options’ liquidity without ignoring them. Employees who believe that the value of their firms will increase of those who need assistance financing the value of utilizing their options may opt for non-recourse financing. Some firms allow their employees to sell their shares back to the firm in a tender offer even though this strategy is not common.

Selling a Private Company’s Shares on the Secondary Market

Here is how to go about disposing of your pre-IPOs on the secondary market.

  • Select your preferred online platform
  • Define the number of shares you want to dispose of and include the price
  • You will be assigned a broker who will match you with a suitable buyer
  • After identifying a buyer, you should seek consent from your organization
  • Once your organization approves the move, you can close the deal.

The share disposal process will proceed fast if there is a high demand for the shares. However, the process often takes weeks and sometimes months. Different platforms offer varying services, but the general process remains the same.

Understanding Secondary Markets 

In the investor and venture capitalist world, an employee’s stock market options and shares are primary. Your firm developed them for you specifically. The exact process happens when a venture capital organization invests in startups or raises funds in an initial public offering. In that case, new shares are generated explicitly for those transactions, also known as primary transactions. When pre-IPO shareholders dispose of their shares to an external investor, no new shares will be generated, and that becomes a secondary transaction.

When Should Holders of Private Company Pre-IPOs Sell their Stock? 

You can choose to sell your stocks if:

  • You require colossal sums of funds immediately.
  • You are not confident the firm’s value will increase
  • You are ready to pay off the highest tax rate on your earnings.

You are not patient enough to wait for the IPO.

How to Sell Your Pre-IPO Shares on the Stock Market

  • Choose your preferred online platform.
  • Define the number of shares you want to dispose of and include the price
  • You will be assigned a broker who will match you with a suitable buyer
  • After identifying a buyer, you should seek consent from your organization
  • Once your organization approves the move, you can close the deal.

Selling Pre-IPO The share disposal process will proceed fast if there is a high demand for the shares. However, the process often takes weeks and sometimes months. Different platforms offer varying services, but the general process remains the same.

When Should an Investor Avoid Selling on the Secondary Market 

Don’t sell on the secondary market if:

  • You need some liquidity without losing interest in your shares
  • You want to achieve long term value from your options and are patient enough to wait for an initial public offering
  • You no longer work with the Company but still want to utilize the 90-days time span to experiment with your options
  • You cannot meet the least sale amount the secondary market medium needs

Pros and Cons of Selling Your Pre-IPOs on the Secondary Market 

The secondary market allows you to maximize the total funds you can earn immediately from your shares. That would be ideal for a startup employee who wants to get the most liquidity without waiting for an opportunity to exit. Still selling on a secondary market comes with the following drawbacks.

Investors Lose 100% of their Equity’s Upside

Disposing of your pre-IPO investment will earn you instant cash, but you will be surrendering any opportunity to earn colossal amounts from an IPO. If you think the Company’s future is shaky, the secondary markets can be an ideal alternative. However, some studies suggest that employees that disposed of their pre-IPO shares before the IPO earned up to 47% less than the average IPO value. Had they waited for the initial public offering, their earnings would be an extra 47%.

Your Need Consent from Your Company

As we have learned before, many companies restrict the sale of pre-IPOs on the secondary markets. Remember, the board of directors will need to approve your intention to sell before proceeding with the plan. Often, many companies will not consent to have their private shares disposed of on the secondary markets.

You Will Incur the Highest Tax Rates Possible

Once you manage to sell your shares, you will need to pay taxes on your earnings. Often you will be taxed at the highest tax rate available. That means you will not gain from the discounted long-term capital earnings rate, where you would have saved at least 31% on taxes.

You Could Sell at a Loss

Buyers rule the secondary markets, and often the best you can get out of your sale is approximately 80% of the overall value. Based on our first disadvantage of selling pre-IPOs and the final IPO price, employees would end up earning approximately 53% of the estimated value on average.

The Company Reserves the Right of First Refusal (ROFR)

Your Company reserves the right to purchase the shares first before allowing you to sell them on the secondary market. Should you identify a buyer and your Company chooses the ROFR, you will still need to pay the regular 5% platform charge for any done deals.

You will Need to Sell a Minimum Equity Amount of $100,000

Every secondary market platform has a minimum share amount that investors can sell. Often, it is approximately $100,000 worth of equity but can also be higher. Some platforms allow investors to combine shares with other shareholders but others do not.

The Process Could Take Longer

Due to a company’s approval procedure, finalizing a deal on the secondary market could take longer than expected. Whether you are working on a timeline or not, there are no guarantees that you will beat the deadline.

Alternatives to the Secondary Markets

Investors can use any of the following alternatives to disposing of their pre-IPO shares on the secondary markets.

Tender Offers

A tender offer is the process where a company opts to re-purchase pre-IPO shares or stock options from their employees. It can also be when a firm chooses external investors to purchase employee equity systematically. While the latter is a secondary sale, your employer organized and approved of it. Tender Offers Some notable companies like Airbnb in New York and Pinterest execute this process for their employees now and again. Tender offers come with various restrictions. However,  their key advantage is that employees get the total value of their shares based on the prevailing price. While tender offers can be a great deal, only a few companies offer them.

Non-Recourse Financing

Non-recourse financing is a fund advance that covers the following:

  • Any potential tax burden
  • Your strike price
  • Extra liquidity that you can use as you like

Employees will only pay back the non-recourse financing amount when a successful exit occurs. When the exit does not happen, or should the Company go bankrupt, the employees do not owe anything. Your shares will act as collateral for the financed amount, meaning that your assets will be safe. Non-recourse financing comes with various advantages, as seen below.

Employees Keep their Equity’s Upside

Seeing that the financing firm will not be selling or buying your shares, you will reserve the ownership and rights to the shares. Suppose the Company’s share value rises and a successful initial public offering occurs, employees can participate.

Employees Earn Liquidity before the IPO

As you finance your exercise, you will earn a cash advance in addition to your exercise costs. As a result, you won’t need to wait for the IPO to utilize your equity value.


  • Pre-IPO investing can be both profitable and risky. However, the advantages outweigh the risks.
  • By choosing the right pre-IPO Company at the right time, you are bound to make massive profits.
  • Unlike in the past, when only large institutional firms would invest in pre-IPOs, individual retailers can participate in a pre-IPO. However, they should meet laid down regulations.
  • Employees can sell their Pre-IPO shares before the IPO, but they have to get approval from the Company’s board of directors.
  • Selling pre-IPOs on the secondary market can be convenient, but it comes with various drawbacks. Existing secondary market alternatives can be ideal for employees.

In conclusion, many successful companies often go public but identifying the ones with the most potential is no mean task. But this doesn’t mean you should avoid IPOs; some experienced investors like Berkshire Hathaway CEO Warren Buffet have purchased stock at the IPO price and have reaped substantial rewards. As a result, when dealing with IPOs, do your research, study prospectuses from various companies and exercise caution.

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