Some companies offer their shares of stock before they can sell shares to the public. This type of company is considered pre-IPO and can be a good investment opportunity.
What is pre-IPO investing?
Pre IPO investing with SoFi is a process of buying a company’s shares before they are tradeable on the stock market. Once these companies are listed, the price of their shares posts will increase, making these investments more lucrative.
Benefits of pre-IPO
1. Reduced Costs
When a company goes public, it releases a certain amount of shares of stock to the public. However, this is controlled by the company and can limit excessive speculation (too many shares being sold).
2. More Shares
When companies go public, they typically offer only a certain number of shares. This is controlled by the company itself, which only releases a set amount of shares per period.
3. More Time
Another benefit of pre-IPOs is that they are typically performed a few years before a company goes public. This gives the investor time to learn about the company and its products while also gaining valuable insight into its management.
4. Raising Capital
According to the experts at SoFi, pre-IPOs allow companies to raise capital from the investing public. This allows the company to expand, attract quality employees, and realize its true potential.
5. Anti-Corruption Policy Holds Up
A good anti-corruption policy can help prevent fraud in any business, including pre-IPOs. By investigating the company and its management, investors can determine whether or not to invest in the company.
6. Valuable Advice
Another benefit of pre-IPOs is that companies can get valuable advice from successful business people who want to invest in the stock.
7. Greater Liquidity
One reason companies sell pre-IPOs is to grow their business and raise money for expansion. In this case, there is more liquidity, and it is easier to sell shares. As companies need to raise money for expansion, the pre-IPO process allows them to sell their stock at a lower cost.
Risks
1. Poor Performance
Another risk of pre-IPOs is that the company will perform poorly after going public. This can cause the value of the stock to decrease, which will hurt investors who own it drastically.
2. Poor Market Conditions
According to Forbes, there are some times in which the market looks unattractive for pre-IPOs. If this is the case, the investor will end up waiting a long time before the company can perform its IPO.
3. Poor Contract Negotiations
One risk of pre-IPOs is that companies can negotiate bad contracts when going public, which hurts investors and the business itself.
4. Government Regulations
Government regulations can also affect pre-IPO business opportunities. As of right now, there are no laws to regulate this type of company. However, future government regulations may be implemented to protect investors.
5. Fraudulent Dealings
According to Krueger, fraudulent dealings can always arise in pre-IPOs. This again causes the value of the stock to decrease and can hurt investors.
6. Negative Ratings
Lastly, one last risk of pre-IPOs is that the company can be negatively rated when going public. This can cause a decrease in the value of the stock and hurt investors.
How to Invest in pre-IPOs
To invest in pre-IPOs, investors need a broker that can handle these transactions for them. For investors who don’t have a broker, they can visit the FINRA website or BrokerCheck to find a broker that can help them with pre-IPOs.
Though there are many benefits of investing in pre-IPOs, investors need to be aware of the risks associated with this type of investment. Each individual needs to research any possible risks thoroughly before investing in a pre-IPO.
Why Do Companies Sell Pre-IPO Stock?
When a company sells the pre-IPO stock, it is usually at a much lower price than the price publicly traded stocks sell for. This gives investors the chance to purchase stocks in these companies at a low cost.
Conclusion
Although there are many benefits of investing in pre-IPOs, it is also important to be aware of the risks associated with this type of investment. Investors should thoroughly research all possible risks before purchasing stock in a pre-IPO.
