Pre-IPO is a stage in the development of a company from the moment when it announces its plans to go public to when these plans come true. This period can last from one to three years. Today, such a product as participation in the Pre IPO of a company has appeared on the market of investment products. By participating in the Pre IPO, you also become a shareholder, as if “in advance”, even before the company officially announces its publicity.
Why is pre-IPO needed for companies?
First of all, it is an opportunity to participate in the company’s fate before its public success, become its investor, and profitably sell your securities. Such investments can bring high returns. But the risks will also be increased. For example, if the company changes its plans and business model, or if it’s going public is unsuccessful, investors who invested in it at the Pre IPO stage may not earn or lose their investments.
Why is this company? If the company’s business is successful and the product and management allow it to develop, then sooner or later, the company’s capitalization will cross the mark of 1 billion US dollars. It is from this moment that the company can become public. Up to this point, the company’s development strategy includes such growth to achieve the opportunity to enter public auctions and attract investors. In the early stages, these are venture investments. And later, when the company already has a real product, a place in the market, and development plans, the company can announce a Pre IPO.
How to make money on pre-IPO?
You become a company shareholder, even if your share in the company is very small. The goal of such a shareholder is to wait for the company’s growth. You have two options when you can earn – if a competitor buys the company or if it goes public.
It must be remembered that you go into an investment product for a period of one to three years, and sometimes longer. A liquidity event is when you can exit an investment product, the moment when the company in which you have invested has successfully gone public. Until that moment, it will be impossible to release their product, or it will be as difficult and unprofitable as possible. The broker may offer you to sell the effect on the secondary market. But the point of your participation in the development is precise stay in it until the liquidity event.
Risks for the buyer
The structure of the Pre-IPO is a fairly unregulated area. It is built from regulated elements, and the central banks of different countries control these elements, but this is a new market, and it is like the wild west. So if you do not have professional knowledge of deal structuring, do not execute those investment products where your success depends on this knowledge.
The issuing company must have a good reputation, transparent reporting, a history in the market, and a formalized decision of the board of directors that it goes public in one to three years.