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Investing in a pre-IPO stock isn’t as straightforward as purchasing publicly traded shares. But there are several ways for investors to back startups before they reach the market regardless of their accreditation status, including crowdfunding platforms and pre-IPO brokers.
Pre-IPO stock is a stock available for purchase before the issuing company goes public in an initial public offering. Also called a pre-IPO placement, this private sale of shares occurs before a company’s official market debut.
This type of pre-IPO investing offers companies the opportunity to raise funds and offset some of the risks associated with the offering. After all, there’s no guarantee a freshly issued stock will do well with the general public, so pre-IPO placements can help counteract the risks of taking a stock public for the first time.
Private investors who invest in a pre-IPO placement get to purchase stock ahead of its official release to the public — typically at a discount. Pre-IPO investors face the same risks as the company issuing the stock, namely that there’s no guarantee the company will do well at market. To reward investors for taking a gamble on pre-IPO stock, many companies offer their pre-IPO placements at a discount.
Beyond the discount, pre-IPO investors have the opportunity to back a company before it’s public and profit from the launch of its stock. These stocks are also better insulated from broad, market-impacting events, which means they tend to be less volatile than those available to the general public.
In 2012, President Barack Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act). The legislation makes it easier for startups to raise capital by loosening Securities and Exchange Commission (SEC) regulations that govern initial public offerings.
The JOBS Act effectively increased the number of shareholders permitted to invest in a company before it must register its stock with the SEC to 2,000. It also opened up pre-IPO investing to up to 500 non-accredited investors, making pre-IPO placements more accessible to retail investors.
What should I look for when choosing a pre-IPO investment?
Reduced volatility and potentially exponential returns make pre-IPO companies an attractive investment opportunity. But before you allocate funds, consider the following:
Investing in a pre-IPO company isn’t as straightforward as buying publicly traded shares. That said, there are a few avenues of opportunity available to those interested in pre-IPO stock:
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Pre-IPO companies present a potentially lucrative investment opportunity — but a lack of financial data may make it difficult to accurately gauge the risks. Before you buy in, review your platform options across multiple brokers to find the account best suited to your investment goals.
Information on this page is for educational purposes only. Finder is not an advisor or brokerage service, and we don't recommend investors to trade specific stocks or other investments.
Finder is not a client of any featured partner. We may be paid a fee for referring prospective clients to a partner, though it is not a recommendation to invest in any one partner.
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