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Pre-IPO Investing: What is it and how does it work?

Wednesday, October 03, 2018

For patient individuals with a taste for high risk and high returns, Pre-IPO Investments can offer an extraordinary return on your investment. So what are they, how do they work and what risks are involved?

What is Pre-IPO Investing?

Pre-IPO Investing is when a company opens up its IPO (Initial Public Offering) to large private investors, such as hedge funds and private equity funds, prior to listing the IPO on the market. It is also referred to as Pre-IPO Placement or Pre-IPO Capital.

How does Pre-IPO Investing work?

A company planning to float shares on the stock exchange in an IPO (Initial Public Offering) may issue a Pre-IPO offering to a limited number of private investors in order to raise capital before their IPO.

Often, a Pre-IPO offering is made when there appears to be a high demand and high interest in the company’s IPO. It is a high-risk investment because it can take place between three to eighteen months before the IPO is scheduled to be released. There is no guarantee the IPO will take place. Investors also run the risk of low returns should the share prices plummet after the IPO.

Investors are given a lock-in period, once the IPO goes to market, to stop them from selling their shares immediately should the share price increase. Therefore, a pre-IPO investment is long-term.

Pre-IPO offers are usually made without a prospectus. For this reason, they can only be made to sophisticated, professional or experienced investors as classified under Section 708 of the Corporations Act 2001 (Cth.). These investors have the capability and knowledge to asses:

  • The risks and merits of the offer
  • The value of the securities
  • The information available compared with what is required to make an informed decision

The Differences between a Pre-IPO Investment and an IPO

Pre-IPO Investments IPO (Initial Public Offering)
Takes place between three to 18-months before the IPO Shares purchased during the IPO period
Not represented by a broker Usually prepared by an Underwriter and represented by a broker
No prospectus available Prospectus available
May be offered a specific number of shares You have a minimum and maximum number of shares you can subscribe to
Have a limited time to invest Have a limited time to invest
Your money is tied up until the company floats and for a period after that You can sell at any time once the company floats
Offered at a considerably discounted price Price is as listed in the prospectus
Limited availability. Usually offered to large clients, individuals with high net worth, and sophisticated, professional or experienced investors. Available to the public

How can you mitigate risk in a Pre-IPO Investment?

Although you cannot avoid the risks of Pre-IPO Investing, you can mitigate some by:

  • Investing closer to the IPO launch date. Look for indicators that show the company is nearing listing.
  • Do your due diligence by ensuring they have the right company structure, has the IPO team been instated, is the company profitable, are their financials available for review and have some of the IPO details been put in place?
  • Make your investment a smaller part of your investment portfolio.
  • Get to know the company better. Meet the management team and know your facts.

Finding Pre-IPO opportunities

PrimaryMarkets offer buyers, sellers and intermediaries a platform in which to participate in off-market transactions. Our experienced team can assist you in identifying relevant funding opportunities and assessing your investment options. Contact us.

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