What is pre-IPO investing? It means buying shares in a private company before it lists on a stock exchange through an initial public offering (IPO). Pre-IPO rounds have drawn a lot of attention because some well-known companies have grown significantly in value before and after listing. This guide explains how pre-IPO investing works, why companies raise money this way, and the risks investors need to understand.
What Is Pre-IPO Investing?
Before a company lists on a stock exchange, its shares are privately held by founders, employees and early investors. In the period leading up to a planned listing, a company may raise money from a wider group of investors in what is often called a pre-IPO round.
Investors in these rounds buy shares at a price agreed privately. If the company later lists, those shares become tradeable on the stock exchange. If the listing is delayed or never happens, the shares stay private, and they can be very difficult to sell.
Why Do Companies Raise Money Before an IPO?
Companies raise pre-IPO funding for several reasons:
- To fund growth and strengthen the business ahead of listing
- To bring in investors who may support the company through the listing process
- To pay for the costs of preparing for an IPO, which can be significant
- To give the company more time to choose the right moment and market for its listing
How Does Pre-IPO Investing Work?
Pre-IPO investments are usually offered through an information memorandum or similar document setting out the company’s plans, finances and the terms of the investment. Shares may be offered directly or through a convertible loan note that turns into shares at a discount to the IPO price.
Investors in pre-IPO rounds are often subject to a lock-up period, which prevents them from selling their shares for a set time after the company lists. This can last anywhere from a few months to a year or more. The intended timetable and stock exchange for a listing are plans, not guarantees, and they can change.
Pre-IPO vs Buying Shares at IPO
Buying shares at IPO means subscribing for shares at the listing price set when the company goes public. Those shares can usually be traded from the first day of dealing, and the company has to publish a prospectus that meets stock exchange rules.
Pre-IPO investors buy earlier, usually at a lower valuation, but accept more uncertainty in return. They rely on the information the company provides privately, the listing may not happen and their shares may be locked up after it does. Our guide on how to research and select IPOs covers investing at the point of listing.
What Are the Risks of Pre-IPO Investing?
Pre-IPO investments carry a high level of risk. The main points to understand include:
- The listing may not happen: IPOs are frequently delayed or cancelled, and market conditions can change quickly.
- Capital risk: private companies can fail, and you could lose all of the money you invest.
- Liquidity risk: without a listing, there is usually no easy way to sell your shares.
- Valuation risk: the price paid in a pre-IPO round may turn out to be higher than the IPO price or the later market price.
- Lock-up periods: even after listing, you may not be able to sell for some time.
- Limited protection: pre-IPO investments are generally not covered by the Financial Services Compensation Scheme (FSCS).
Because of these risks, pre-IPO opportunities in the UK can usually only be promoted to certain types of investor, such as certified high net worth or sophisticated investors.
What Should You Check Before Considering a Pre-IPO Investment?
Before looking further into any pre-IPO opportunity, it is worth checking:
- What the company does, its financial position and its filings on Companies House
- Which stock exchange it plans to list on, the expected timetable and who is advising on the listing
- The price you are paying, and how that compares with recent funding rounds
- Whether there is a lock-up period after listing, and how long it lasts
- What happens to your investment if the listing does not go ahead
- How much of your overall portfolio you would be comfortable having in a single private company
Investors considering a pre-IPO investment are always encouraged to seek independent financial advice appropriate to their own circumstances, and to read the full terms before committing any capital.
About New Capital Link
New Capital Link works with experienced and high net worth investors, helping them understand the range of alternative investment opportunities available to them, including private equity and pre-IPO opportunities. Please read our risk warning before considering any investment.
If you would like to learn more about pre-IPO investing, get in touch with our team for an informal discussion.
