1. Who sells shares in a pre-IPO?
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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.
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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.
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.
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:
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.
There are several compelling reasons to invest in this opportunity:
Also Read: IPO Allotment Process
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
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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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.
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.
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.
Before buying shares in a company, verify its legitimacy by checking its registration or exempt status. Legitimate businesses are usually registered or exempt, so avoid investing unless the company is properly registered or exempt.
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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