How to Buy Pre-IPO Stock
Invest in private companies and early-stage startups before they go public. Learn how to buy pre-IPO stock and seize early investment opportunities.
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Pre-IPO investments let you invest in companies before they go public. These stocks can grow as rapidly as the company does.
However, they're also risky. This is because there's no guarantee that the company will go public. Even if it does, its price also isn't guaranteed to rise.
If you're an accredited investor that's willing to take the risk, there are a few ways for you buy pre IPO-stocks.
Invest in Private Companies
- Invest in pre-IPO companies through an EquityZen fund.
- $10,000 minimum investment
- Available to accredited investors only
Invest in High-Growth Startups
Equitybee gives accredited investors access to high-growth, VC-backed startups. By funding employee stock options, accredited investors can gain investment exposure to private companies at past valuations. In exchange for funding the options, you will receive a percentage of future proceeds from any successful liquidity events. Subject to availability. Investments involve risk; Equitybee Securities, member FINRA
What Are Pre-IPO Stocks?
Pre-IPO stocks are shares of companies that have not yet gone public. This means they aren't listed on any stock exchange and aren't publicly accessible for individuals to buy or sell.
These stocks are usually traded privately among accredited investors, venture capital firms, and angel investors. Let's take a closer look.
To subscribe to pre-IPO, you need to be an accredited investor and find a pre-IPO company that offers shares. Accredited investors can subscribe through secondary marketplaces, brokers, or crowdfunding platforms.
Non-accredited investors may invest through a special purpose vehicle (SPV). SPVs are often used by private equity firms and venture capital firms to invest in pre-IPO companies.
How Do I Buy Shares of Pre-IPO Stock?
To buy pre-IPO stocks, you can opt for a broker or a crowdfunding platform, as the process can be quite lengthy and complex.
Continue reading to learn the various ways to buy pre-IPO stocks.
U.S. Securities and Exchange Commission (SEC) Financial Criteria include:[1]
- Net worth over $1 million, excluding primary residence (individually or with spouse or partner)
- Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year
Use a Broker or Secondary Marketplace
Secondary platforms act as marketplaces where investors can buy pre-IPO stocks from shareholders. However, the buying and selling process is not as direct as on the stock exchange.
First, you need to confirm you're an accredited investor. Then, you have to indicate a buying interest in a specific private company. A specialist will then reach out to guide you through the process.
Brokers like EquityZen and Forge Global offer direct share acquisition. With this, you can directly buy the shares of the private company you want, but the minimum starts at $100,000.
Nasdaq Private Market is also an option but mainly for institutions.
Forge Global | EquityZen | |
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| Minimum Investment | $10,000 Direct Share Acquisition: at least $150,000 | |
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Buy Through Crowdfunding Platforms
Crowdfunding platforms pool money from investors to fund startups, mostly in their early stages. It's usually much easier to invest through these platforms than brokers.
An example would be StartEngine, where even non-accredited investors can buy shares of startups.
Simply browse through its offerings and click Invest Now on a campaign to buy shares. The minimum amount varies per startup: $250 for some, $25,000 for others.
Join an Angel Investing Network
Joining an angel investing network is the most complex way to buy pre-IPO stocks. However, once you're in, it's also where you can easily find investing opportunities.
Founders typically pitch their business ideas to angel investors, giving you access to these exclusive prospects. The catch, though, is that most memberships in angel investing groups are invite-only.
To be an angel investor, you need a lot of money, business knowledge, and great connections.
If you don't know where to start, learning through the resources at the Angel Capital Association (ACA) is a good option. ACA is a society of angel investors and groups in the United States.
Buy Single-Company Fund Shares
A Single-Company Fund is an SPV or entity created by brokers or crowdfunding platforms for the sole purpose of owning shares in an individual private company.
Here's how it works. You buy the shares of the fund along with other investors, then the fund uses that as capital to buy stocks in an individual private company on your behalf.
Technically, it's the fund that owns the pre-IPO stocks, not you. However, you will still receive your pro-rated portion either in shares or cash after an exit event such as an IPO.
In EquityZen, this product is called Single-Company Funds and the minimum is $10,000. In AngelList, this is called Syndicates and the minimum may be as low as $1,000 or higher.
FundersClub also has a Single-Company Fund. However, it is cash-settled and you will not receive physical shares at all.
Other Ways to Invest in Pre-IPO Stocks
Even if you're not buying pre-IPO stocks directly, you can still invest in private companies through these alternatives:
- Stock option funding
EquityBee lets you fund the stock option of startup employees who otherwise can't pay for it themselves.The minimum investment starts at $10,000 per offer.
- Private equity funds or venture capital funds
These funds invest in a diversified portfolio of private companies. Here are a few examples:- FundersClub's Multi-Company Fund[3]
- YieldStreet's Bonaccord Private Equity Fund[4]
- EquityZen's Multi-Company Fund[5]
- Equitybee's Venture Portfolio Fund[6]
The minimum amount varies per platform but it ranges from $10,000 to $100,000.
- FundersClub's Multi-Company Fund[3]
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Why Invest in Pre-IPO Stocks?
There are a few reasons why investors might want to invest in pre-IPO stocks:
- Diversification benefits
Investing in pre-IPO companies can help you diversify your investment portfolio. By including early-stage ventures, you may tap into emerging sectors and boost potential returns. - Potential for Influence
As a pre-IPO investor, you may have the opportunity to influence the company's direction and growth. This can be a rewarding experience and can also lead to additional returns if the company is successful. - Lower investment minimums
Pre-IPO investments often have lower investment minimums than traditional venture capital investments. This can make them more accessible to a wider range of investors.
Can Anyone Buy Pre-IPO Stock?
Only accredited investors can invest in pre-IPO stocks in the United States. Here are the requirements to qualify as an accredited investor according to the SEC: [7]
Financial criteria:
- Net worth over $1 million, excluding primary residence (individually or with spouse or partner)
- Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year
Professional criteria:
- Investment professionals in good standing holding the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82)
- Directors, executive officers, or general partners (GP) of the company selling the securities (or of a GP of that company)
- Any "family client" of a "family office" that qualifies as an accredited investor
- For investments in a private fund, "knowledgeable employees" of the fund
Risks of Investing in Pre-IPO Stocks
Investing in pre-IPO stocks is riskier than investing in publicly traded stocks.
Pre-IPO stocks are often more volatile and illiquid than publicly traded stocks. This means they can be more difficult to sell and may experience larger price swings.
Additionally, there is a risk that the company may never go public. If the company does not go public, investors may have difficulty selling their shares and may lose their investment.
How to Evaluate Pre-IPO Stocks
Here are the general guidelines to evaluate pre-IPO stocks:
- Skilled Team
Is the team composed of skilled individuals who can contribute to the growth of the company? - Business Idea
Is the business idea innovative and useful? Does it solve a community problem? - Management
Is the company led by a capable and business-savvy management team? - Profitability
Is the company profitable according to its sales? Is it considered financially healthy? - Competitive Advantage
What does this company offer that others don't? What is its unique advantage over its competitors? - Terms of the Deal
What are the terms of the company before you can buy shares? How do they plan to provide liquidity for early investors?
Unlike public companies, the SEC does not require private companies to file disclosures such as periodic financial statements. This makes it harder for an investor to evaluate a private company.
Pre-IPO investing is still largely considered speculative despite these guidelines. Know the risks before investing.
Tips for Investing in Pre-IPO Stocks
If you are considering investing in pre-IPO stocks, here are a few tips:
- Do your research
Before investing in any pre-IPO stock, it's important to do your research on the company and the industry in which it operates. This will help you assess the company's risks and potential rewards. - Invest only what you can afford to lose
Pre-IPO stocks are risky investments, so you should only invest what you can afford to lose. - Diversify your portfolio
It's important to diversify your investment portfolio by investing in a variety of different asset classes, including pre-IPO stocks, publicly traded stocks, bonds, and cash. This will help to reduce your overall risk.
Bottom Line
Pre-IPO stocks are shares of companies that have not yet gone public. They can offer the potential for high returns, but they are also risky because there is no guarantee that the company will go public or that its stock price will rise after it does.
To buy pre-IPO stocks, you must be an accredited investor. Accredited investors are individuals who meet certain income or net worth requirements. Once you are accredited, you can buy pre-IPO stocks through secondary marketplaces, brokers, or crowdfunding platforms.
Invest in High-Growth Startups
Equitybee gives accredited investors access to high-growth, VC-backed startups. By funding employee stock options, accredited investors can gain investment exposure to private companies at past valuations. In exchange for funding the options, you will receive a percentage of future proceeds from any successful liquidity events. Subject to availability. Investments involve risk; Equitybee Securities, member FINRA
Invest in Private Companies
- Invest in pre-IPO companies through an EquityZen fund.
- $10,000 minimum investment
- Available to accredited investors only
It's important to do your research before investing in any pre-IPO company and only invest money that you can afford to lose.
References
- ^ U.S. Securities and Exchange Commission. Accredited Investor, Retrieved 11/10/2023
- ^ Harvard Business Review. Why Start-ups Fail, Retrieved 05/30/2024
- ^ FundersClub. What types of funds are listed on FundersClub?, Retrieved 05/29/2024
- ^ YieldStreet. Bonaccord Private Equity Fund, Retrieved 05/29/2024
- ^ EquityZen. A Primer on EquityZen's Multi-Company Funds, Retrieved 05/29/2024
- ^ Equitybee. Venture Portfolio Fund (VPF), Retrieved 05/29/2024
- ^ U.S. Securities and Exchange Commission. Accredited Investor, Retrieved 11/27/2023
- ^ U.S. Securities and Exchange Commission. SEC Modernizes the Accredited Investor Definition, Retrieved 11/10/2023
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