Pre-IPO investing once was a rarefied world reserved mainly for large investment firms and institutional investors. Now, however, retail investors attracted by the allure of potentially monumental profits finally have the ability to buy pre-IPO shares too.
When you invest in pre-IPO shares, you’re harnessing the potential for explosive growth. However, like most investments that could lead to high rewards, when you purchase pre-IPO stock, you’re also taking on significant risk.
Today, I’m going to discuss how you can invest in pre-IPO shares of companies. It’s not for the faint of heart, however, so you’ll need to weigh whether the high risk is worth the potential reward. That’s why I’ll also go into some of the advantages and disadvantages of buying pre-IPO stock, and answer several other burning questions about the stock.
If you’re ready to get in on the ground floor of a company that might one day become a household name (or already is one), keep reading.
What Is Pre-IPO Investing?
An initial public offering (IPO) occurs when a private company sells shares of its stock to the public for the first time. Pre-IPO investing, then, means buying or otherwise acquiring a stake in a business before it makes its initial public offering. Those who buy pre-IPO stock typically get it at a steep discount compared with the IPO price, and thus can sell it for much more than it was initially worth.
Why Would a Company Sell Pre-IPO stock?
A company often sells pre-IPO stock for the same reason it goes public: to raise funds. Pre-IPO stock can look mighty attractive to venture capitalists (VC) and other potential funding sources, who naturally want to generate big returns from their investments.
Also, sometimes founders will want to sell shares to help lock in some gains from their years of hard work. This fundraising strategy can also help offset some of the risk of an eventual IPO being less successful than expected.
Companies can benefit from selling pre-IPO stock in other ways, too. Consider that many pre-IPO investors are hedge funds, investment funds, and other institutional investors. These investors often have experience and resources that can help the firm in ways that they wouldn’t have enjoyed by simply selling all their stock to the public. At time, this expertise can even help inexperienced founders transition from running a private company to running a publicly traded one.
Related: The 10 Best Fidelity Funds You Can Own
Who Can Make Pre-IPO Investments?
As I mentioned earlier, pre-IPO investing has largely been limited to special groups of investors, including accredited investors, private equity funds, hedge funds, and other exclusive investing classes.
This changed under the Jumpstart Our Business Startups (JOBS) Act. This U.S. law aims to encourage people to fund small businesses by easing some of the securities regulations. And one of the major changes is that non-accredited investors can now buy pre-IPO stock through crowdfunding platforms and “mini-IPOs.”
One company category is the “emerging growth company” (EGC). The JOBS Act made it so companies that qualify as EGCs can now solicit information from potential buyers before publicly filing for an IPO. These companies can also delay some reporting requirements, which makes it more affordable to issue pre-IPO stock.
How to Invest in Pre-IPO Companies
I’ll be clear: Many pre-IPO opportunities still require you to be accredited. Thus, where you can buy pre-IPO stock still varies depending on whether you’re an accredited investor or a non-accredited investor. How much money you can afford to invest is another typical consideration.
WealthUp Tip: To be an accredited investor, you must have a yearly income over $200,000 (or more than $300,000 with your spouse) for the previous two years, with the expectation of earning at least that much in the current year. Or you must have a net worth of more than $1 million; be a general partner, director, or executive officer for the business issuing the unregistered securities; or hold a Series 7, 65, or 82 license.
Always research private companies before you buy their pre-IPO stock. Be aware of the risks, and be realistic in your expectations. Depending on whether you’re an accredited or non-accredited investor, the platforms you can use to buy pre-IPO stocks will vary.
The platforms listed below have excellent track records in helping individuals invest in pre-IPO stocks.
For Accredited Investors
Equitybee (Equity)
- Available: Sign up here
- Type of investor: Accredited investors
- Minimum investment to start: $10,000 per offer
- Price: 5% brokerage fee. Investors may also pay 5% carry percentage of remainder in the event of a successful liquidation.
Equitybee is a marketplace that connects investors with startup employees who want to extract value from their existing stock options.
Equitybee fields funding requests from people who work at high-growth, venture capital-backed startups. Then, investors in Equitybee’s platform provide funding in exchange for a portion of the employees’ future stock value (pending a successful exit).
Equitybee has connected its investors to successful startups such as Affirm, Unity, Databricks, and 23andMe. Investors can filter through current startup opportunities by industry, venture capital firm, and other vital factors.
The minimum you can invest is $10,000. Equitybee charges a 5% brokerage fee upon funding an employee’s stock options. In the event of a successful liquidity event, investors might also pay a carry percentage of 5% of the remainder in excess of the original investment.
Equitybee is a registered broker-dealer and is regulated by the SEC and FINRA.
- Equitybee allows accredited investors to participate in startups by funding the stock options of employees of high-growth, VC-backed firms in fintech, AI, healthcare, cleantech, and other attractive industries.
- Filter startup opportunities by industry, VC firm, total funding raised, offer terms, and more.
- $10,000 minimum investment.
Percent (Private Credit)
Percent is an investment platform designed for accredited investors who are interested in accessing private credit (non-bank lending).
You can diversify your portfolio with investments such as …
- small business lending in Latin America
- U.S. litigation finance
- Canadian residential mortgages
- merchant cash advances
Percent has built a way for retail accredited investors to access a wide range of private credit opportunities with a clear view into their performance through its innovative tools and comprehensive market data. That allows investors to make better-informed decisions, source and compare opportunities, and monitor performance with ease.
This platform also provides access to an alternative investment that’s a little more liquid than other alts, with some debt investments only lasting nine months, with liquidity available after the very first month in some cases.
The service targets annualized returns on unsecured notes between 12% to 18% on average and up to 20%. And while investment minimums vary, many Percent opportunities require only $500 to invest.
If you’re interested, visit Percent’s site to learn more or open an account.
- Access for accredited investors to private credit markets, which historically have been limited to institutional investors
- Shorter-term investments, with many durations between 9 months to several years, and liquidity available after the first month, if the borrower provides this option
- Lower minimums (most deals requiring only $500 to invest)
- Diversification, with access to small business lending in Latin America, U.S. litigation finance, Canadian residential mortgages, merchant cash advances, and more
- Uncorrelated returns with the stock market and a potential hedge on stock market volatility
- Greater liquidity than many alternative investments
- Low investment minimums
- Low stock market correlations
- Only accessible to accredited investors
For Accredited and Non-Accredited Investors
Fundrise (Equity + Credit)
- Available: Sign up here
- Type of investor: All investors
- Minimum investment to start: $10
- Price: Fundrise: 0.15% annual advisory fee. Fundrise Pro: $10/mo. paid monthly, or $99/yr. paid annually
Fundrise is a popular real estate and alternative asset investing platform that allows you to diversify through its numerous funds. Each fund holds a number of properties and is designed to provide varying levels of risk and income.
Investors have two primary ways to invest in real estate through Fundrise:
Fundrise
The standard Fundrise account is a managed portfolio that allows you to invest for as little as $10. When you open and fund an account, you select an investment strategy, then Fundrise allocates your money to the fund (or funds) that make up that strategy. You can add more money to your account over time, again with a small minimum additional investment of just $10. Fundrise’s dashboard will show you how you’re invested and what you’ve earned. If you’ve set up an Investor Goal, Fundrise’s goals tracker will let you know if you’re on the right track—or if not, what to do to make sure you achieve that goal or goals.
Fundrise Pro
Investors who want a little more control over their investments might consider Fundrise Pro. Users of this monthly subscription service can allocate however much they’d like to whatever funds they’d like, making direct investments into specific funds. They can also choose between dynamic allocation (investing more or less into certain funds over time to meet your plan’s specifications) or flat allocation (simply investing the same amount of money per your allocation choices). Fundrise also offers access to its proprietary data warehouse, Basis, as well as curated insights from the Wall Street Journal.
Everything else you should know about the Fundrise platform
Fundrise is primarily a commercial real estate investing platform, but it does have other offerings. For instance, it boasts the Innovation Fund, which holds primarily private high-growth tech companies, as well as a private credit investing strategy.
You don’t have to be an accredited investor to use Fundrise—it’s open to any U.S. citizen age 18 or older. But accredited investors do enjoy some perks, including being able to invest directly into several funds closed to non-accredited investors, and occasionally, better ability to invest in Fundrise’s eREITs. If you are an accredited investor, once you’ve opened your account, go to Settings → Advanced Options → Accreditation to upload proper documentation.
Visit Fundrise to learn more about this alternative asset class or sign up today.
- Regardless of your net worth, you can now benefit from real estate’s unique potential for generating consistent cash flow and long-term gains with Fundrise starting as low as $10.
- Enjoy set-it-and-forget-it managed portfolios with standard Fundrise accounts, or actively select the funds you want to invest in with Fundrise Pro.
- Diversify your portfolio with real estate, private tech investing, or private credit.
- Low minimum investment ($10)
- Accredited and non-accredited investors welcome
- IRA accounts available
- Highly illiquid investment
Titan Invest (Equity + Credit)
- Available: Sign up here
- Type of investor: All investors
- Minimum investment to start: $500
- Price: Automated strategies: Free. Actively managed strategies: 0.70%-0.90% of AUM, depending on size of deposits. Additional fees may apply for products managed by third parties.
Titan is a wealth management firm that helps you pair investments in both the public and private markets. That means building a portfolio not just with stocks and bonds, but also alternatives and even cash management services.
New York City-based Titan manages money for more than 50,000 members. Should you join those ranks, your funds can be put to work in a number of ways:
- Smart Cash: Rather than stuffing your money into a high-yield savings account, you can optimize your savings through Titan’s Smart Cash program. In Smart Cash, Titan automatically moves your money between Cash Reserve and Treasury money market funds on Titan depending on which offers the best, most tax-efficient yield.
- Index Investing: Titan’s Index Investing provides diversified access to both stock and bond ETFs, giving you exposure that’s automatically managed for you. Best of all? No advisory fees.
- Managed Stocks: Titan offers actively managed stock portfolios, such as Titan Flagship (U.S. large caps) and Titan Opportunities (under-the-radar companies).
- Alternatives: Titan also enables you to invest in alternative assets including real estate, venture capital, private credit, and crypto. In many cases, these assets are being managed by noteworthy third parties including Carlyle Group, Apollo Global Management, and ARK Invest. Users interested in pre-IPO investing can do so through Cathie Wood’s Ark Venture Fund, which owns innovative companies throughout both their private and public lifecycle. With the ARK Venture Fund, you can put your money to work in artificial intelligence, energy storage, blockchain technology, and more.
Minimum investments differ by product, but typically range between $500 and $2,500. Advisory fees for actively managed strategies range from 0.70% to 0.90% of your AUM, depending on how much you deposit. Strategies managed by Titan’s partners might have additional fees. Passively managed strategies charge no advisory fees.
Visit Titan to learn more or sign up today.
- Enjoy a managed portfolio of public and/or private investments through Titan, a wealth management firm that pairs traditional assets like stocks and bonds with alternatives like VC and private credit.
- Investment selections include ETF-based index investing, managed stocks, real estate, venture capital, private credit, and crypto.
- Earn up to 5.36% (as of 11/21/23) on your cash through Titan's Smart Cash program, which moves your cash holdings between Cash Reserve and Treasury money market funds depending on which provides the most tax-efficient yield.
- Minimum investments typically range between $500 and $2,500.
Should You Invest in Private Companies?
As I’ve pointed out, investing in a private company is a high-risk, potentially high-reward decision.
According to research by John H. Cochrane in “The Risk and Return of Venture Capital” published by the National Bureau of Economic Research, the returns for venture capital investments can vary wildly.
In his analysis of 17,000 financing rounds in 8,000 companies, Cochrane found that about 15% of private companies that go public or are acquired achieve returns greater than 1,000%! Roughly 35% of the companies had returns below 100%, and 15% of the companies had negative returns. He determined the most probable return is about 25%.
Once he adjusted for the selection bias of firms that go bankrupt, the mean return for VC investments was about 57% per year. These investments are very volatile, which is why there are occasionally extremely high returns, but also the chance you lose money.
In general, private companies outperform publicly traded companies. However, only surviving companies can perform well, and private companies don’t always survive. In fact, about 1 in 5 American businesses fail in their first year, and almost half don’t last five years, according to data from the U.S. Bureau of Labor Statistics.
There is also the rare “unicorn,” which is a privately held startup valued at more than $1 billion. SpaceX and Instacart are excellent examples of unicorns within the venture capital industry. These private companies sometimes remain private to avoid investor scrutiny and control.
Basically, whether or not you should invest in private equity depends on your risk tolerance and available investment funds.
Risks of Investing in Pre-IPO Shares
Pre-IPO investing can be lucrative, but it’s also risky for a number of reasons:
1. Pre-IPO Shares Lack Liquidity
In most situations, once you buy pre-IPO stocks, you have to hold onto them until the company issues public shares or another liquidity event occurs, such as an acquisition. And sometimes, companies have a lockup period agreement that prevents investors from reselling their stocks immediately.
A couple of platforms allow investors to sell pre-IPO shares, including those awarded to them as employees. However, they’re rife with risk because of the difficulty of properly valuing those shares, so I don’t recommend people go down that rabbit hole.
Anyone who invests in pre-IPO placements should do so as a long-term investment.
2. You’re Buying Unregistered Securities
Shares of a company that is not registered with the Securities and Exchange Commission (SEC) don’t carry the same legal protections as publicly traded stock. Unregistered companies have thinner transparency requirements, which means you might have to make a decision with far less information, and a much less complete picture, than you get with publicly traded stocks.
When dealing with unregistered securities, investors need to take the initiative and ask questions about the company’s products and/or services, management, and more. Because it’s much easier for an unregistered company to act fraudulently without getting caught.
3. The Pre-IPO Company Might Never Have an IPO
No company is guaranteed to launch an IPO and become a publicly traded company. Sometimes, firms just don’t meet their potential, and they’re unable to gin up enough excitement about a public offering.
But in some cases, management simply decides it doesn’t want to meet an exchange’s complex accounting rules and reporting requirements. To conduct a registered public offering, companies must file a registration statement with the SEC. The business can’t sell the securities covered by this statement until the SEC declares the registration statement effective.
If a company runs into issues with the SEC or otherwise doesn’t end up going public, investors with pre-IPO shares are often left with very limited (or no) ways to exit.
4. Pre-IPO Investing Carries Supercharged Stock Picking Risk
All stock investing comes with risk, and pre-IPO investing is no exception—in fact, the risks are much higher.
The company might never go public. If it does, there’s no telling how big (or small) your return could be after the offering. Even if the offering goes well, if you have a lockup period and the stock plummets in value after going public, you could still lose out on your big payday.
