How to Invest in Pre-IPOs if You’re a Retail Investor

What are pre-IPOs?

When a private company is transitioning to public ownership, it sells its first shares of stock to the public in a process known as an initial public offering (IPO). This is also known as “going public.”

But even before a company goes public, it usually sets aside large blocks of shares to institutional and individual (retail) investors to help raise capital. These shares, called pre-initial public offerings, or pre-IPOs, are a popular way for private companies to raise capital well in advance of a public offering.

 

Why invest in pre-IPOs?

Consider Alibaba:

Widely regarded among the top unicorns in the last decade. In September of 2014, it was able to raise $25 billion for its IPO. It now has about $180 billion in assets and is often referred to as the Amazon of China.

There are numerous articles that refer to some variation of: “If you had invested $X at the Alibaba IPO, you would have $Y now.” But, the real question is, what would happen if you had invested in the Alibaba pre-IPO.

That’s how Singapore-based venture capitalist Ozi Amanat made millions in just one day: he purchased a $35 million block of Alibaba’s pre-IPO shares in 2014 for less than $60 per share, then, on the first day of trading, earned a 50% return when the stock price closed near 90%.

Clearly, all investors—even casual ones—should know about pre-IPOs and consider them as alternative investments. Their valuations could be deeply discounted prices and if they go public you have the potential to sell your pre-IPO shares for a profit within months after a company goes public. They may help offset any of the potential risks of investing in pre-IPOs, making them a boon to your portfolio.

 

Can retail investors purchase pre-IPO shares?

Because these shares are usually offered in large blocks, pre-IPOs are often purchased by institutional investors. In fact, it used to be the case that only deep-pocketed institutions—such as hedge funds, private equity firms, and venture capital firms—could invest in pre-IPOs.

But the requirements for buying pre-IPO shares have changed. Thanks to the Jumpstart Our Business Startups (JOBS) Act of 2012, it’s now easier than ever for investors to get in on pre-IPOs via pooled investments.

The JOBS Act, which was designed to promote investment in startups with less than $1 billion in revenue, helps retail investors get in on pre-IPOs by:

• Allowing businesses to raise money via crowdfunding: As of May 2016, companies have been able to raise capital through Regulation Crowdfunding. Businesses have also been allowed exemption from registering with the SEC, provided they meet certain conditions. Retail investors can invest in these debt or equity offerings. (It’s important to note, however, that investment limits are based on income.)
• Expanding Regulation A: The SEC now allows companies to offer up to $50 million in shares to investors each year without registering with the SEC.

 

Risks of Investing in Pre-IPO’s

Similarly, to most investments, Pre-IPO’s come with risk of capital investment.  Pre-IPO’s are considered long term investments and are considered illiquid.  There is no guarantee that the investment will go public

Many companies may be in their mid-stages of development and could be planning implementation of a concept, product or strategy that will be subject to numerous uncertainties. These companies may have more limited financial resources than established companies and are consequently more vulnerable to changes in economic conditions.

Pre-IPOs may be subject to dilution.  In other words, if the company raises additional funds at a later date through the issue of new shares subscribed to by new Investors, the percentage stake in the issuing company held by Investors who do not subscribe to this capital increase may fall.

 

How to invest in pre-IPOs

Thanks to the JOBS Act, alternative investments like pre-IPOs are more accessible to retail investors than ever before. There are many different ways you can start investing in them.

The JOBS Act created a boom in equity crowdfunding, which reached more than $438 million in 2020. As a result, many equity crowdfunding platforms, such as AngelList and FundRise, have become household names for non-accredited investors looking to invest in quickly growing startups early on.

This is by no means your only option: you can also invest in pre-IPOs indirectly. One convenient way to do so is to purchase stocks from companies that invest in growth-stage businesses.

One such company is Sutter Rock Capital, a venture capital firm listed on the Nasdaq that invests in companies two or more years before they go public. Some of their pre-IPO investments included Spotify and Dropbox. Sharespost and other similar firms let investors access private market opportunities, which grant access to a more diverse portfolio of late-stage venture-backed private companies.

However, choosing the right stocks and timing the market can prove difficult—and that’s not even considering the challenges of making alternative investments into startups in the first place. In fact, the average investor barely beats inflation when investing on their own.

The truth of the matter is that pre-IPO investments can be risky. After all, the overwhelming majority (90%) of startups fail.

So, how can retail investors start investing in pre-IPOs without the fear of failure?

 

Set yourself up for success

At HUDSONPOINT Capital, we specialize in connecting retail investors to unique pre-IPO investment opportunities of private companies. By partnering with our expert financial professionals, you put yourself in a better position to diversify and potentially increase principal.

How does it work?

For qualified retail clients, we have two sources of insider shares:

• Angel investors and venture capitalists looking for liquidity
• “Unicorn” startup employees seeking liquidity

Our investments are structured so that we only take a single “slot” of a company’s capitalization. Retail investors can then purchase membership interests in a company’s funds. If the company you’re investing in goes public, we may either distribute or liquidate shares to our members, depending on the investment valuation and market conditions.

This is how we give retail investors like yourself carefully guided access to pre-IPOs. While it’s important to remember that all pre-IPO investments carry inherent risks, our aim at HUDSONPOINT Capital is to continually identify the best strategies and opportunities for our clients.

HUDSONPOINT Capital has over 20 years of client-focused financial experience. Our financial professionals pride themselves on their transparency and goal-oriented approach—this is what allows them to help you choose pre-IPOs that suit your unique investing style, risk tolerance, and goals.

If you’re interested in adding pre-IPOs to your portfolio, please schedule a call to learn more about the pre-IPO shares we have available right now.

 

 

Please note that any investment involves risk including loss of principal. Some risks of investing directly or indirectly in real estate include declining real estate values, changing economic conditions and increasing interest rates. Private Shares are for qualified investors and involve a high degree of risk

The information provided is not directed at any investor or category of investors and is provided solely as general information about products and services or to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither National Securities nor its affiliates are undertaking to provide you with investment advice or recommendations of any kind.

Companies named within this document are for illustrative purposes and investors should not expect similar performance.  Private companies are not required to adhere to SEC filing requirements and may never file to go public.

Not all investors qualify for Private investments.

Securities offered through National Securities Corporation Member FINRA/SIPC