September 16, 2020

Pre-IPOs Versus IPOs: What You Need To Know

Written by: HUDSONPOINT Team

Pre-IPOs Versus IPOs

The savvy investor makes sure to understand all the tools at their disposal. However, once you get outside the standard stocks and bonds, financial instruments tend to get more complicated. It’s important to understand how they work, as well as the advantages and disadvantages of each.

There’s a lot of confusion people have between Pre-IPOs Versus IPOs. Let’s do a deep dive in what you need to know about both financial instruments. Pre-IPOs Versus IPOs

What is an IPO?

An IPO is an Initial Public Offering. This happens when a private company decides to go public. They issue stock in their company, giving them newfound capital and a stock ticker on the public markets. This means that anyone can invest in them and their valuation is subject to market forces.


In order to go public, they have to register with the SEC and are subject to quarterly reporting requirements. Usually, a company decides to go public once they’ve reached a valuation of about $1 billion, which is often referred to as a “unicorn.”


An IPO allows a company to grow much more quickly (with access to readily available capital). It also makes their stock liquid. This offers an exit strategy for the founding team, as well as giving millions of retail investors a chance to take part in the offering.


What is a Pre-IPO?

A pre-IPO (or pre-initial public offering) is similar to an IPO in the sense that it gives investors an opportunity to buy shares of a company. However, the similarities end there.

A pre-IPO occurs in a private company, not a public. This is a younger company, looking to raise capital so it can one day go public. There is no guarantee that the company will ever go public.

Because of their private status, they are not subject to the SEC’s scrutiny. This also means there’s less transparency for investors.

The pre-IPO shares are also subject to a lockup period, to prevent buyers from turning around and selling them instantly.

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Benefits to investing in an IPO

There are several benefits to investing in an IPO.

First and foremost, this is the first chance the public gets to invest in a company. For successful companies, this is often the lowest public price point its stock will be at. For instance, Amazon debuted at $18 in its IPO. If you had invested $1,000 then, you would have $1.2 million today.

You also enter with the same information as the big players (institutions, banks, hedge funds, etc.). All information is public and vetted by third-party auditors. Transparency is paramount with this stage of the investment.

Of course, there are always risks to investing in any company, including bankruptcy, market risk, etc.


Benefits to investing in a Pre-IPO

There are several benefits to investing in a pre-IPO, as well.

Much like an IPO, you get to invest early in a company’s timeline. However, pre-IPOs let you get in even earlier, where shares sell at a discount. The discount is in large part because of the risks associated with the investment, including a lack of liquidity and transparency.

However, the upside potential is much greater. Imagine getting into Amazon before its price was at $18. Alibaba held a pre-IPO in which the shares sold below $60 per share. After its IPO on the first day of trading, the stock closed at $90. Yes, the risks are higher, but so are the potential rewards.

However, there are laws to prevent investors from immediately cashing out on the first day. Pre-IPO investors are subject to a “lock-up period,” in which they are not allowed to sell any stock for a certain number of days. Regulations like this help mitigate illegal trading schemes like “pump and dumps.”

Prior to 2012 and the JOBS Act, pre-IPOs were reserved for only institutional investors. Now, retail investors can access them through certain financial institutions.

Want to catch the next unicorn?

If you’re interested in learning more about IPO/Pre-IPO or any other type of asset class, the team at HUDSONPOINT Capital can help.


Call us at 1-888-544-5244 to speak with an Advisor



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.

This is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation of any products or services. Opinions are subject to change with market conditions. The views and strategies may not be suitable for all investors and are not intended to be relied on for legal or tax advice.

Securities offered through National Securities Corporation Member FINRA/SIPC


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