What Is Pre-IPO Investing? 

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Pre-IPO refers to companies raising capital by selling stock to private investors, such as hedge funds and high-net-worth individuals, prior to their public trading debut. Unlike regular IPOs, these lack draft prospectus and carry risks such as illiquidity and potential loss of invested capital. However, getting in early can bring in significant returns when the company eventually gets listed. Know the process of investing in pre-IPO shares and related details.

What Is Pre-IPO Investing? 

Before a stock goes public, unlisted shares can be sold privately by a private company through a pre-IPO placement, often at a discounted price due to the large investment and associated risks. Such unlisted shares can be bought from different intermediaries and brokers, which in turn buy the shares from company promoters, shareholders or ESOPs.

Initially, this practice was limited to high-net-worth (HNI) individuals and institutional buyers, but it is now open to retail investors. Now, you can invest in pre-IPO shares by selecting suitable companies and monitoring their growth trends. Businesses can easily sell unlisted shares to anyone, simplifying the transfer process between demat accounts.

How Can Investors Benefit from Pre-IPO Investing? 

Pre-IPO stocks usually come with a one-year lock-up period during which they cannot be traded. These shares must be held in dematerialised (demat) form; otherwise, they cannot be sold once the lock-up period is over. After this period, pre-IPO investors have various options: 

  • Exit via IPO: Pre-IPO investors can choose to exit by participating in the company’s IPO. For example, if the shares were allotted at Rs. 180 before the IPO and the IPO issue price after one year is Rs. 270, investors can exit their positions at a profit by participating in the offer for sale (OFS). This method allows investors to earn significant returns by making the most out of IPO-related market hype.
  • Private Off-Market Transfer: Investors can privately sell unlisted shares to potential buyers. This transaction takes place directly between demat accounts negotiated privately between the parties. For this option, it is necessary that the shares are in demat mode.
  • Buy and Hold Strategy: If investors believe in the company’s potential for substantial growth, they may choose to hold their shares for the long term. They may choose to hold if they expect the share price to rise significantly within a few years. Some investors take a mixed approach, selling some of their pre-IPO shares in the IPO and holding the rest to maximise their gains.

Additional Read: Upcoming IPO in December 2023

In short, pre-IPO investors can either engage in private off-market transfers, exit the IPO by selling shares through the OFS, or hold their shares based on an assessment of the company’s future potential. These decisions depend on individual strategies and the market outlook.

What Are the Advantages of Pre-IPO Investing? 

There are several compelling reasons to invest in this opportunity: 

  1. These investments are relatively insulated from stock market volatility, minimising the impact of major events such as financial crises or events like the COVID-19 pandemic. Unlike traditional stocks, these investments tend to remain stable during turbulent market periods due to their lack of market exposure. 
  2. It provides the potential for high returns, especially for early investors who have invested way before the company goes public. Such investors stand to benefit from exponential growth, especially for technology stocks. 
  3. In addition, investing via this route allows you to acquire shares of fundamentally strong companies at significantly discounted prices. For traders, this presents an opportunity for profitable short-term trades, while long-term investors can build wealth and achieve their financial goals by holding these stocks over time.
  4. While there are risks for investors, companies can mitigate them by discounting share prices, which provides financial protection and attracts new investors. This approach protects the company’s funds even if the IPO meets a weak demand and benefits pre-IPO investors as the issue price is typically higher than the discounted price.

Also Read: IPO Allotment Process

What Are the Disadvantages of Pre-IPO Investing? 

Investing in pre-IPO opportunities is like navigating in uncharted waters. No matter how diligently you research, you cannot know the problems that a private company is facing. Such companies are not required to make any disclosures to the public about their risks, ongoing litigations and other important details. Moreover, unlisted shares are often difficult to sell due to their low liquidity and carry counterparty risks.

The essence of any pre-IPO investment is to expect the company to go public and provide you with an exit strategy. However, this expectation is not without its share of risks. IPOs are often delayed or delayed due to adverse market conditions or delays in regulatory approvals, posing significant risks to your exit strategy.

Also Read: IPO Cycle

Summary 

Pre-IPO placements offer early access to investment in pre-IPO shares of promising companies with early or late-stage investment options. Early-stage companies have higher potential, while late-stage companies are less risky. That is why you should focus on fundamentals and company management; this approach bypasses stock price speculation, opens up avenues for substantial long-term wealth growth and provides you with new opportunities for high returns. 

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Frequently Asked Questions

1. Who sells shares in a pre-IPO?

Answer Field

In private firms, key executives such as the CEO, CFO, and CTO own shares of the company that they can sell to investors via pre-IPO placements.

2. What is meant by growth companies in pre-IPO?

Answer Field

Growth-oriented companies often seek funds for expansion rather than prioritising immediate profits. Their goal is to expand into new markets, strengthen their presence and expand their customer base. These companies use pre-IPOs to support business growth, even if it results in short-term losses.

3. Can retail investors be a part of pre-IPO?

Answer Field

Yes, retail investors can now participate in pre-IPO placements that were previously restricted to high-net-worth investors due to high capital requirements. This allows retail investors to invest in private companies before other investors.

5. Is there a pre-IPO lock-in period?

Answer Field

Yes, pre-IPO shares usually carry a lock-in period. Under current regulations, a company’s share capital must be held free of any trading activity for a period of one year from the allotment of shares, prior to an IPO.

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