Traditionally it’s been difficult for individual investors to buy into an IPO and almost impossible to buy pre-IPO stocks. That has certainly changed in recent years. If you know how to buy pre-IPO stock, you may be able to acquire shares in companies with high potential at bargain prices.
☝️ Pre-IPO investing comes with significant risks and several potential restrictions. You’ll need to study the company carefully and be sure you want to invest. In the US, you may need to meet the SEC’s accredited investor criteria to qualify. Pre-IPO stocks may not be available for all companies that are going public. Read our guide on pre-IPO investing for more information on how pre-IPO stocks work and the potential risks and rewards that they present.
In this post:
How Do Companies Sell Pre-IPO Stock?
Most pre-IPO stocks are sold in one of three ways.
- Angel investors or Venture Capital Firms who provide initial financing often acquire large blocks of shares.
- Pre-IPO placements occur when IPO underwriters make stocks available at a discount to selected investors before an IPO. These typically happen immediately before the IPO.
- Stock options are sometimes provided to employees, who may resell their shares, subject to restrictions.
Unfortunately, unless you’re a major player or an employee of the company, it can be difficult to acquire shares by these devices. In some cases, there may be secondary markets where institutions that acquired stocks early resell them.
3 Ways You Can Buy Pre-IPO Stock
If you want a piece of the action you’ll need to know how to buy pre-IPO stocks. Here are three different ways you can find and get in on pre-IPO investment opportunities.
Use a Specialized Broker
Brokers and financial advisors often take part in pre-IPO trades. They may have acquired stocks that they are willing to sell or represent sellers who seek buyers.
You can ask your current broker about pre-IPO stocks or use a broker that specializes in pre-IPO sales. Here are a few brokers to look into.
- Forge Global recently merged with SharesPost to create a major pre-IPO marketplace. Forge links sellers with buyers of pre-IPO stocks. The minimum investment is $100,000 and some sales may be more expensive or restricted to qualified buyers.
- EquityZen offers pre-IPO stocks in specific companies. They also provide managed pre-IPO funds that allow diversified exposure to a group of pre-IPO companies. EquityZen has listed Pre-IPO shares in Rivian, Robinhood, Stripe, and many others. The minimum investment is only $10,000, though some investments may have higher minimums.
- Nasdaq Private Market maintains a network of accredited buyers that invest in pre-IPO stocks through a flexible auction process. Investors must meet the SEC’s revised accredited investor criteria.
- Pre-IPO is a European broker operated by French firm Invest Securities. They offer placements in selected pre-IPO companies for as little as 2,500 euros.
- SecFi specializes in helping employees of private companies sell their stock options. Many companies allow employees to liquidate stock options to help them achieve their financial goals. SecFi links these sellers to buyers that meet the SEC’s accredited investor criteria.
- HudsonPoint Capital offers pre-IPO stocks in selected companies, sourcing stocks from employees and early investors seeking liquidity. Contact the company for information on available stocks.
⚠️ Brokers may impose restrictions on the resale of pre-IPO stocks and may require investors to meet some qualifications. There is no assurance that stocks in any specific Company will be available through any given broker.
Buy Pre-IPO Stocks Directly From Companies
Another way to buy pre-IPO stocks is to take on the role of an angel investor or venture capitalist yourself. If you provide early-stage financing to a startup, you can acquire stocks. If the company eventually holds an IPO, you stand to reap stellar gains. Here are some ways you can buy pre-IPO stock directly from companies.
- Contact banks, non-banking financial institutions, and accounting firms. Find out if they know of any private companies that are planning to issue pre-IPO stocks.
- Attend startup pitch events and competitions and look for promising companies that you can invest in. Attending these events is also a shrewd way to build connections with seasoned investors and industry insiders.
- Watch the news. Set up email alerts to find out about companies that are in need of investment and intend to go public. Contact them directly and ask them whether they are willing to offer pre-IPO stocks.
- Register with crowdfunding platforms like AngelList, OurCrowd, and FundersClub, which allow you to invest directly in startup companies.
- Register with stock tokenization platforms like tZero, which converts pre-IPO stocks into blockchain-based tokens. You can trade these for cash any time you want.
Using these methods, you can get connected with companies at an early stage in their growth curve. They will probably not be actively planning IPOs. You will have to tie up your capital for some time to reach the IPO phase. Many companies never get there. If you choose a winner, your earnings could be spectacular, but you’ll have to be selective and lucky.
Buy Pre-IPO Stocks Indirectly
By now, buying pre-IPO stocks probably seems daunting because of the investor criteria, minimum investment requirements, and risks of investing in companies directly. If you don’t meet those criteria, or the risk is too high for you, but you’d still like some exposure to the pre-IPO market, consider investing in pre-IPO companies indirectly. You can do this in two ways:
- Publicly held venture capital firms like Apollo Global Management (NYSE:APO), Blackstone Group (NYSE:BX), Carlyle Group (Nasdaq:CG), and many others allow you to buy stock in a company that holds a portfolio of pre-IPO stocks. Study publicly traded firms and look at their holdings and selection criteria.
- Private Equity Exchange-Traded Funds like Invesco Global Listed Private Equity ETF (NYSEARCA:PSP) Morgan Creek-Exos SPAC Originated ETF (NYSEARCA:SPXZ), and the ProShares Global Listed Private Equity ETF (NYSEARCA:PEX) pool investor funds and purchase a range of private equity shares.
These investments provide exposure to a diversified range of private equity investments. That cuts your potential gains but also substantially trims your risk.
⚠️You should keep in mind that private equity funds are actively managed and may have significant fees.
Buying pre-IPO stock carries significant risks, and it can be a challenge to find available stocks in companies that you believe in. And while there may be significant restrictions and requirements, it’s still not impossible.
The resources given in this article provide you with a range of options. If you study them in detail, you’ll be in a better position to make an informed decision. Remember to check the fees and restrictions associated with any transaction!
Companies and funds mentioned here are examples, not recommendations. It’s always best to consult a qualified advisor before making any investment.
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