The Secret To Investing Pre-IPO: How to Get in Early
By Sat, Apr 27, 2019
THE OPPORTUNITY TO INVEST PRE-IPO
Congratulations! If you are looking to invest in early-stage companies that could disrupt industries and have the potential for rapid growth… then you’ve come to the right place.
For anyone who has ever been fortunate enough to get in on a hot initial public offering (IPO), the rewards can be plentiful. Well, imagine if you could get involved even before that IPO happens and invest at a discount to the IPO price.
This is exactly how some of the most wealthy Wall Street Elite, venture capital firms and merchant banks have done it for years. Now thanks to new laws, it is available to every investor, including you!
Up until 2012, investing in pre-IPO companies was reserved for venture capitalists and accredited investors. The Jumpstart Our Business Startups or JOBS Act changed those limitations. Formerly “off-limits” Pre-IPO investments can now be used by the everyday investor for potential portfolio growth.
Whether you are looking for big financial gains, or enjoy investing in companies you have faith in (i.e. embracing a technological concept or backing a green mission), pre-IPO investing offers the opportunity for just about anybody to sink some dollars into a business that may flourish. Unlike traditional IPOs, you don’t have to wait until shares become available to the public on a stock exchange, and these hopeful businesses welcome investors of all shapes and sizes.
The new form of investing is starting to shift the power from Wall Street Elite and putting it in the hands of the average American.
There are several reasons to invest in companies before they go public. For starters, 99% of the time, pre-IPO investing is done at a significant discount to the IPO price. This is how the Wall Street Elite have made fortunes since the early days of the stock market and this is why the majority of Americans have been left out of these opportunities.
“You get to fund the future and power the change you want to see.”
Second, pre-IPO investments allow you to balance your portfolio with a liquid asset, because once they list on a stock exchange, now investors have the ability to sell their position. Venture assets have historically not been highly correlated with traditional asset classes, and they are usually private companies where your investment is stuck until a buy out, IPO or you lose all of your money. While they are typically high risk, high return, they can balance out a more stable, low-return portfolio. Plus, another benefit of pre-IPO investing is that you get to fund the future and power the change you want to see.
HOW PRE-IPO INVESTING WORKS
Investors simply need to follow a few b asic steps before they’re on the w ay to participating in a new pr e-IPO investment opportunity.
1. PICK A COMPANY
This is the fun part! Some investors look for companies that peak their interest while others focus on specific sectors. Before selecting a company for investment, participants should have a good understanding of the business at hand, and if you have a financial planner or money manager, check with them to determine if it fits your risk profile.
A good place to start is the Pre-IPO Buzz Directory which features a curated selection of pre-IPO companies. When you browse through the directory, you can sift through the profiles of businesses that are currently raising capital through different equity crowdfunding portals.
2. SIGN UP ON AN EQUITY CROWDFUNDING PLATFORM
Before signing up on a crowdfunding platform, you will need to make sure that you understand the difference between crowdfunding sites.
There’s a pretty good chance that you’ve heard of the website called Kickstarter or GoFundMe. It’s important to understand
that those types of sites that have made crowdfunding mainstream are considered to be “Reward-Based Crowdfunding.” This means that you DO NOT receive any equity ownership in any company that you help fund. In return for your “donation,” you will receive a “perk” from the company. This could be a product of theirs or a phone call from the CEO, etc…
Sites like SeedInvest, StartEngine and many others offer “Equity Crowdfunding.” This means that in exchange for your money, you will receive ownership/shares in that particular company.
The new Jumpstart Our Business Startups or JOBS Act legislation granted access to anyone who understands the risks of purchasing an “EQUITY” stake in privately held companies, and the increasing popularity of crowdfunding portals presented the ideal place to conduct those equity transactions. Equity ownership in a company does end when the business exits. Exits occur when the business experiences success – a buy out from another firm or a highly desirable move to take the company public through an IPO. Alternately, exits also result from outright failure.
In the speculative all-or-nothing world of startup investing, the expansion of the market didn’t escape the purview of the SEC. The commission’s guidelines currently limit annual contributions based on an investors financial standing. Startup companies seeking capital can raise a maximum of $1 million per year through crowdfunding efforts. Regulation CF dictates that investors who earn less than $100,000 annually can contribute up to $2,000 in a year. Individuals who have a net worth and earnings greater than $100,000 each are limited to amounts of 10% of income or net worth, whichever is less.
Moving up the ladder, the SEC also allows capital raises of up to $20 million through Regulation A guidelines that let more established private companies seek funding from all classes of investors without capping their contribution limits. These dollars
often fund growth rather than startup operations. Tier 2 or Reg A+ funding levels extend to $50 million– but the crowdfunding or Reg CF maximums apply in this case.
Now that you understand the difference, here are some areas that initial investors should examine before pledging assets:
· RISK: Investors are made aware that a total loss of capital could occur. These investments are highly speculative and differ greatly in nature from common stocks and mutual funds.
· LIMITED TRANSFERABILITY: Securities acquired through pre-IPO investing can’t easily transfer to another party. Lock-up periods, in which assets can’t be sold or traded, apply to invested funds.
· DIVERSIFICATION: Quite simply, it’s best not to keep all your eggs in one basket. There is value in minimizing risk by allocating assets among many companies rather than just one.
· CANCELLATION: Investors can typically nix the deal two days prior to the end date of a fully funded campaign. After that time frame, the terms are final, and refunds will not be issued.
· LIMITS: Dollar limits on crowdfunding sites are commensurate with investment experience. Accredited investors– those who earn $200,000 or more and have a net worth of $1 million or greater– can contribute more money than novice investors.
· RESEARCH: It’s the duty of the participant to gather information on which to base an investment decision. Most deal funding portals pre-screen companies but do not offer opinions on suitability nor make buy or sell recommendations.
Now that you’ve investigated which companies strike your fancy and have accepted the risks associated with these types of investments, it’s time to invest.
3. INVEST ONLINE
Online investing puts crucial decision-making in the hands of anyone who relishes the thrill of the chase and the rewards at the finish line. Unlike enlisting the help of a financial consultant or robo-adviser, you get to choose which startups might be the next Apple or Google. However, we always encourage all of our members to speak with a financial planner or broker prior to making any investment decision to determine if the risk profile fits your investment criteria.
Pre-IPO investing lets everyday investors share in the same exhilarating opportunities that were once only afforded to deep-pocketed venture capitalists.
Equity crowdfunding platforms make it simple to get started and invest online. After basic administrative details are tended to, participants select an investment and determine how much they want to invest.
Along with defining your investment mettle, you’ll also need to develop basic research skills. Understanding financial statements is a definite plus and uncovering a company’s competitive advantage will allow you to trust your instincts. Fortunately, the resources at your disposal have never been more detailed or voluminous. Mandatory filings for public companies and information on private companies that list on crowdfunding sites can be found on the Internet via the Securities and Exchange Commission’s (SEC) EDGAR database. Some crowdfunding portals also provide investors the means to engage company principals via discussion boards.
HOW TO SELECT A PRE-IPO OPPORTUNITY
Investors typically feel a wave of excitement when wading through all the prospects for investment. At this stage, it’s important to leverage the resources that equity crowdfunding portals offer. Any equity crowdfunding portal is REQUIRED to be licensed with FINRA in order to be able to sell securities through their website. Therefore, the equity crowdfunding portal must put the companies listed on their site through a thorough pre-screening process that examines the foundations of a company before they list on their site.
It’s important to understand the type of due diligence that equity crowdfunding portals practice before they bring a company into the fold. Other stages involve an inspection of business models, a top-to-bottom team analysis, and a look at the overall market potential for the product or service. Equity crowdfunding screenings only make up part of the formula. Your own research completes the equation.
You might choose a company based on your own knowledge and strengths. Is or was your career geared toward finance? If so, a budding Fintech business might make an ideal investment prospect since they may understand the value of the service compared to offerings from traditional brick-and-mortar institutions. Perhaps your selection might align with your social views. Renewable energy companies have dual objectives of turning profits and preserving the environment. Those goals may appeal to your green-conscious lifestyle. While a solid ROI works for anybody, supporting a business that reflects your personal philosophies may be equally as satisfying.
About the Author
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