Pre-IPO’s: Shadow Market In the Spotlight

Omeed Malik
Aug 12 · 3 min read

IPO’s, initial public offerings, have long been the gold standard in evaluating the success of a tech company. Venture-backed capital can only sustain a business for so long throughout their fundraising phases. The liquidity that an IPO generates reinvigorates a business and lays the groundwork for long term prosperity. So why has a trend emerged of corporation’s of delaying going public in the stock exchange?

It’s because of the power of Pre-IPOs.

What are pre-IPOs? It’s ostensibly, a secondary, more exclusive offering of a yet-to-be-traded company to its employees and shareholders. Think of it as a late-stage round of fundraising with increased benefits to the investor and private firm. These shares create liquidity to said company at a time where going public is on the horizon.

How does the pre-IPO placement work?

Discounted from the forecasted amount of the forthcoming IPO, pre-IPO placement allows the investor to trade a high-demand company before the exchange is open to the public.

This secondary market is most active among the over 230 plus, “unicorns,” privately held companies whose evaluations list at an over one billion dollar estimation.

Pre-IPO investing isn’t for everyone; there’s a built-in barrier of entry to buy shares on this secondary market for large still-private companies. One would have to be vetted as an accredited investor to own pre-IPO stock. An accredited investor means you make over a couple-hundred thousand annually or have a net worth of over one million dollars. Even then, a registered broker-dealer would have to have an inside track to the soon-to-be-public, private entity for the investor to get shares before the company starts trading on the stock exchange.

What is the cause of companies delaying going public?

The main reason for lingering in the realm of being a private company before going public is optionality. IPO’s can create a lot of unexpected market scrutiny for the company, can force shake-ups of control, and limits the corporation’s overall flexibility. In essence, the company lets its private shareholders dictate the company’s value before the public can.

Since 2000, the rise of global secondary trading or capital raising has gone up from 2.5 billion dollars to 34 billion in 2017. Legislation has assisted in this spike. The 2012 Jobs Act, allowed for up to 2000 private shareholders, up from 500 before enacted.

Are there risks in pre-IPO’s?

There are inherent, unique risks to pre-IPO share placements than that of post-IPO investing of shares. It’s an arena for aggressive and versed investors. It requires more predictive powers in the analysis of a company’s trajectory along with a keen understanding of a company’s decision making without publicly disclosed information. If demand is low in the post-IPO phase, it’ll force share prices to drop; however, the pre-IPO discounted price serves as a counter-balance. Also, there is no guarantee on when a company is going to go public, making pre-IPOs a more long-term than short term play. All in all, an involved investor can find pre-IPO shares as a very lucrative venture.

Pre-IPO sharing was once a shadow market but now is in the spotlight with unicorns like rideshare companies like UBER and LYFT recently going public. Unicorns soon to go public include; home rental giant Airbnb, customer service powerhouse Postmates and financial trading titan Robinhood. While anticipation for the opening bell of their IPO is high, demand for their pre-IPO trading is already ringing in investors portfolios.

For more information check out Omeed’s website here.

Omeed Malik

Written by

Omeed Malik is the Founder and CEO of Farvahar Partners. He is also a Term Member of the Council on Foreign Relations.

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