A Guide for Australian Investors
Pre-IPO investing provides an opportunity to acquire shares in a private company before its shares are listed on a public securities exchange such as the Australian Securities Exchange. Once largely limited to venture capital funds, private equity firms and institutional investors, pre-IPO opportunities are becoming more accessible to eligible wholesale and sophisticated investors through specialised private-market platforms.
The appeal is easy to understand. Investors may gain exposure to a company during an important stage of its growth and potentially benefit if the company subsequently completes a successful initial public offering. However, pre-IPO investing also carries significant risks. Private companies generally provide less public information, their shares can be difficult to sell and there is no guarantee that an anticipated IPO will ever occur.
Understanding how pre-IPO investing works, how shares are acquired and how returns may eventually be realised is therefore essential before committing capital.
What is pre-IPO investing?
Pre-IPO investing means purchasing shares in a privately owned company before it completes an initial public offering, commonly known as an IPO.
An IPO is the process through which a company offers shares to public investors and seeks admission to a securities exchange. Following a successful listing, its shares can generally be bought and sold through the public market.
Pre-IPO investing takes place at an earlier point in the company’s development. The business may already have established operations, customers and revenue, but its shares remain unlisted. In some cases, the company may be actively preparing for an IPO. In others, a public listing may be only one of several possible long-term outcomes.
The term “pre-IPO” should not be interpreted as a guarantee that a listing is imminent. A company may delay its IPO, pursue a trade sale, raise additional private capital or decide to remain privately owned. Investors must assess the business as a private company rather than relying entirely on the prospect of a future listing.
How do investors acquire pre-IPO shares?
There are two principal ways investors can acquire shares in a pre-IPO company: through a primary capital raising or a secondary share transaction. PrimaryMarkets facilitates both types of opportunity through its private-market investment and trading platform, connecting eligible investors with companies raising capital and shareholders seeking to sell existing shares.
In a primary capital raising, the company issues new shares to investors. The investment funds are paid directly to the company and may be used to expand operations, develop products, recruit employees, enter new markets, make acquisitions or strengthen its balance sheet. PrimaryMarkets provides companies with a structured platform through which they can present capital-raising opportunities to eligible wholesale and sophisticated investors.
The issue of new shares increases the total number of shares in the company. Existing shareholders may experience dilution unless they participate in the raising or hold rights that allow them to maintain their percentage ownership.
In a secondary transaction, an investor purchases existing shares from a current shareholder. The seller might be a founder, employee, early investor, venture capital fund or another shareholder seeking liquidity. The purchase price is generally paid to the selling shareholder rather than to the company.
Through the PrimaryMarkets trading platform and dedicated company Trading Hubs, eligible buyers and existing shareholders can indicate their interest in buying or selling shares in participating private and unlisted companies. Transactions remain subject to available counterparties, company approval, investor eligibility and any transfer restrictions applying to the shares.
Some pre-IPO opportunities combine both elements. A company may issue new shares while also facilitating the sale of a limited number of existing shares under the same transaction.
Why do companies raise capital before an IPO?
Preparing for an IPO can be expensive and operationally demanding. Companies may need additional capital to strengthen the business before they are ready to approach public-market investors.
A pre-IPO raising may fund an expansion program, support commercialisation, increase production capacity or provide working capital. It may also help the company achieve financial and operational milestones that could support a stronger valuation at the time of listing.
Companies can also use a pre-IPO round to introduce strategic or institutional investors to the share register. The participation of experienced investors may improve governance, provide industry connections and assist management as the company prepares for the greater scrutiny associated with public ownership.
The capital raising itself does not ensure that an IPO will proceed. Market conditions, business performance, regulatory requirements, valuation expectations and investor demand can all influence the timing and feasibility of a listing.
How is the price of pre-IPO shares determined?
Unlike shares traded on the ASX, pre-IPO shares do not have a continuously quoted market price. Their value must be negotiated or established through the terms of a capital raising.
The price may be based on the company’s most recent funding round, financial performance, revenue growth, comparable company valuations, intellectual property, market opportunity and anticipated future earnings. The level of investor demand and the company’s need for capital may also affect the valuation.
For example, if a company is valued at $40 million before receiving a new $10 million investment, its pre-money valuation is $40 million and its post-money valuation is $50 million. An investor contributing the full $10 million would, subject to the precise terms and capital structure, hold approximately 20 per cent of the company following the transaction.
Investors should distinguish between the price paid for each share and the company’s overall valuation. They should also understand whether the valuation is calculated on a fully diluted basis, which takes into account options, warrants, convertible securities and other instruments that may become shares in the future.
A valuation described as a “discount” to a potential IPO price should be treated cautiously. The final IPO price may change, and there may be no IPO at all. A lower entry valuation can provide a margin for potential growth, but it does not remove the underlying investment risk.
What rights come with pre-IPO shares?
Not every share provides the same economic or voting rights. Before investing, it is important to identify the class of shares being acquired and review the company’s constitution and shareholders’ agreement.
Ordinary shares commonly provide voting rights and a proportional entitlement to dividends and capital distributions. Preference shares may carry additional rights, such as priority in receiving proceeds if the company is sold or wound up. Some securities may include conversion rights, anti-dilution protections or preferential dividend terms.
Pre-IPO investors should also look for restrictions on transferring shares. Private-company constitutions often require board approval before a shareholder can sell, and existing shareholders may hold pre-emptive rights or rights of first refusal.
Other relevant provisions can include drag-along and tag-along rights. Drag-along provisions may allow a majority of shareholders to require minority holders to participate in a company sale. Tag-along rights may allow minority investors to join a sale initiated by larger shareholders on equivalent terms.
These provisions can materially affect an investor’s ability to sell, participate in a future transaction and receive proceeds from an exit.
Who can invest in pre-IPO companies in Australia?
Access depends on the structure of the offer and the applicable disclosure requirements.
Many private capital raisings are made only to investors who qualify under exemptions in section 708 of the Corporations Act 2001. These may include sophisticated, professional or other eligible investors who can participate in certain offers without receiving the same disclosure document that would ordinarily accompany a public offer.
One commonly used pathway involves certification by a qualified accountant. ASIC explains that a person holding the relevant current certificate may be treated as a sophisticated investor for offers of shares or debt, or as a wholesale client for certain financial services. The precise eligibility requirements and how they apply to a particular offer should be confirmed with an appropriately qualified adviser. ASIC provides further information about qualified accountant certificates and investor classification.
Some private companies may raise funds under other exemptions, including the small-scale personal offer exemption. ASIC notes that this exemption is subject to limits on the number of investors approached and the amount raised, as well as restrictions on advertising the offer. ASIC outlines the principal disclosure requirements and exemptions for fundraising offers.
Eligibility to participate should not be confused with the suitability of the investment. Meeting a financial threshold does not establish that a particular pre-IPO opportunity is appropriate for an investor’s circumstances, objectives or tolerance for risk.
What information should investors examine?
Public companies must comply with extensive disclosure and continuous reporting obligations. Private companies are generally subject to a different level of public disclosure, which means investors may need to conduct more of their own investigation.
Depending on the offer, investors may receive an information memorandum, investment presentation, financial statements, company constitution, shareholders’ agreement, subscription agreement and details of the proposed use of funds.
Due diligence should extend beyond the company’s projected valuation. Investors should examine its business model, revenue quality, cash position, operating costs, customer concentration, competitive advantages, intellectual property and management experience.
The capital structure is also important. Investors need to understand how many shares are already on issue, whether multiple classes exist and how outstanding options or convertible instruments could dilute their ownership. The rights of earlier investors may influence the order in which proceeds are distributed if the company is sold or wound up.
Any forecast IPO timetable should be tested against the company’s financial readiness, governance, audit history and ability to satisfy the relevant admission requirements. ASX requires applicants to meet criteria relating to matters such as company size, shareholder spread and free float. Meeting those criteria does not automatically result in admission; the exchange retains discretion over listing applications. ASX publishes its current admission criteria and listing requirements.
What happens if the company completes an IPO?
If the company successfully lists, an investor’s private shares will generally convert into or become shares in the listed entity in accordance with the IPO restructuring arrangements.
The investor may then hold securities capable of being traded on the relevant exchange. However, the shares may be subject to escrow or other sale restrictions. Escrow prevents specified shareholders from selling for a defined period and is often used to promote alignment between existing shareholders and new public investors.
Even when no formal escrow applies, selling immediately after listing may not be commercially desirable or practically achievable. The market price can rise or fall sharply, particularly where trading volumes are limited.
An IPO can provide a pathway to liquidity, but it does not guarantee a profit. The listing price may be lower than expected, and the market price may fall below the investor’s original pre-IPO entry price.
How do pre-IPO investors make a return?
A return can arise through several possible outcomes.
If the company completes an IPO, investors may eventually sell their shares on the public market, subject to any escrow or transfer restrictions. If the company is acquired, shareholders may receive cash, shares in the acquiring company or a combination of both. A private investor or investment fund may also offer to purchase existing shares through a secondary transaction.
Some mature private companies may pay dividends, although growth-stage businesses often reinvest earnings rather than distribute them.
The timing of any return is uncertain. A successful exit may take several years, and some investments may never achieve a liquidity event. Investors should therefore be prepared to hold pre-IPO shares for an extended and undefined period.
What are the potential benefits of pre-IPO investing?
One potential advantage is the opportunity to invest before a company becomes widely accessible through the public market. If the business grows and later achieves a higher valuation, early investors may benefit from that increase.
Pre-IPO investing can also provide exposure to industries and companies that are underrepresented on public exchanges. As businesses remain private for longer, a greater proportion of their development may take place before an IPO.
For experienced investors, private-company shares may broaden portfolio exposure beyond conventional listed shares, fixed income and property. However, diversification only provides a benefit when investments are selected carefully and remain appropriately weighted within the wider portfolio.
What are the major risks?
The most important risk is the potential loss of the entire investment. Private companies can fail, encounter funding shortages or be unable to commercialise their products. Even a promising company can be affected by poor execution, competition, regulatory change or deteriorating economic conditions.
Illiquidity is another defining risk. There may be no established market for the shares, and the company’s constitution may restrict transfers. An investor who needs to access their money may be unable to sell at an acceptable price—or at all.
Valuation uncertainty can also be significant. Without frequent arm’s-length transactions, the reported value of a private company may not represent the price that could be achieved in an actual sale.
Further capital raisings can dilute existing holdings, while investors in different share classes may possess stronger rights. Information may be less detailed and less frequent than the reporting available from listed companies.
Finally, an anticipated IPO may be delayed or cancelled. Market conditions can change rapidly, and a company that appears to be approaching a listing may choose a different funding or ownership strategy.
Pre-IPO investing compared with investing in an IPO
Pre-IPO investing occurs while a company is still privately owned. An IPO investment is made as part of the formal offer associated with the company’s public listing.
An IPO will ordinarily be supported by a prospectus containing prescribed information about the company, the securities being offered, the use of proceeds, financial information and material risks. The prospectus is lodged with ASIC and is subject to a statutory exposure period. ASIC’s Moneysmart website recommends carefully reviewing the prospectus, including the company’s financial position, competitors and sector-specific risks. Moneysmart provides a useful overview of how IPO investing works.
A pre-IPO offer may instead be accompanied by an information memorandum or other private offer materials, depending on how the transaction is structured. These documents may not be subject to the same disclosure regime as a public prospectus.
The two types of investment therefore represent different stages, documentation, liquidity conditions and risk profiles.
The role of private-market platforms
Historically, private-company investments were arranged through personal networks, corporate advisers, venture capital firms and investment banks. Technology-enabled private-market platforms are helping to create a more organised process for discovering opportunities, reviewing information and completing transactions.
PrimaryMarkets connects eligible investors with opportunities in private companies and provides infrastructure to support capital raisings and secondary-market transactions. Companies can use the platform to present investment opportunities and, where appropriate, establish controlled Trading Hubs through which existing shareholders and eligible buyers can indicate an interest in buying or selling shares.
A private-market platform does not turn unlisted shares into listed securities or eliminate the risks of private-company investing. Transactions remain subject to eligibility requirements, company approvals, available counterparties and the terms applying to the shares.
Is pre-IPO investing suitable for you?
Pre-IPO investing can provide access to companies at an important stage of development, but it requires patience, careful due diligence and the capacity to tolerate substantial uncertainty.
Investors should be comfortable committing capital for an indefinite period and should not depend on an IPO occurring within a particular timeframe. They should understand the company’s valuation, capital structure, shareholder rights, transfer restrictions and potential future funding requirements.
Independent legal, tax and financial advice can help an investor assess how a particular opportunity fits their objectives and broader portfolio.
Pre-IPO investing is ultimately not simply about buying shares before a listing. It is about becoming an owner of a private business, with all the risks, responsibilities and potential opportunities that private ownership entails.
This article contains general information only and does not constitute financial, legal or tax advice. Pre-IPO and unlisted investments can be speculative, illiquid and may result in the loss of some or all invested capital.