Pre-IPO Investing: Expert advice for the Professional Investor

By: Len Mcdowall
This article takes a look at the pros and cons of investing into what is called Pre-IPO capital. What is Pre-IPO Capital? Well it's exactly that, capital that is raised prior to an IPO. So to make things clear, an IPO, or initial public offering, refers to the time when a company is about to list on the stock exchange, and they have issued a prospectus in order to attract investor funds. The amounts sought vary greatly depending on the size of the company and the need for capital. So if you invest into an IPO, you get the prospectus via a broker or online, fill in the application form and post it in along with a cheque. About 3 to 4 weeks later the company lists and you get your shares which you can immediately sell if you want to. You are usually limited by the maximum number of shares you can subscribe to. It may be $10,000 for example. There will also be a minimum subscription. This varies from float to float of course. The other thing that is common with an IPO offering is that there is a defined time period in which you must respond - usually about 3 weeks.

This allows the company and their broker to coordinate the float with the exchange. It also creates urgency for the investor by giving a deadline in which to make a decision by. The basics on Pre-IPO... Pre-IPO is much different to this, although it sounds similar. Pre-IPO is raised anywhere from 3 months to 18 months prior to the company listing onto the ASX. It is usually done without a prospectus and in most cases is done at a time when there is no stock-broker representing the company or underwriting the float. At the pre-IPO level, there is no guarantee that the company will make it to the actual IPO, what the share price will be, or even which broker will do it. Also, because it may take up to 2 years before the company floats, your money is pretty much tied up until then.

As you can see, there is higher risk involved. To reflect this, pre-IPOs are usually offered at a considerable discount to the anticipated IPO price. For example, if company X believed that they will list for $1, they may offer shares in a pre-IPO capital raising at $0.25. Should they end up listing for $1, then you make 4 times on your money at the IPO.

Most investors have not even heard of pre-IPO investment opportunities. This is because they are only usually marketed to wholesale investors, high net worth individuals, professional investors, and investment funds. So to gain exposure to one, you sort of need to know the right people. Even high net worth individuals do not often get exposed to pre-IPO opportunities simply because they are not connected to the company or the broker/advisor managing the offer.

Most opportunities are restricted to 'wholesale' investors however limited opportunities are sometimes available to some 'retail' investors.

Key strategies for reducing investor risk in Pre-IPO opportunities...

There is no safe way to invest in pre-IPO opportunities. Simply because there are many factors that may prevent the company from reaching the stock market. So the key is to invest into companies that are fairly close to listing. Some of the indicators for this are:-

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