the power of one

Pre IPO for non accredited investors

Is it possible to purchase a share in a large-cap private company for retail investors?

Private equity market is still relatively closed for retail investors. To invest directly in a company like SpaceX or Klarna you need to have accreditation and a lot of capital. The entry ticket to become a direct shareholder is about $300k. But with the appearance of different fintech startups individual investors getting a chance to participate in the growing private equity market. But first of all, let’s understand who are accredited investors and who are not.

Accredited investors

For each jurisdiction there are different requirements to become an accredited, or as it called in EU ‘experienced’ investor. However, the main idea is clear — a person should have some free capital and experience in financial markets.

In the US, a natural person alone (or together with a spouse) has to have a net worth over $1,000,000; or annual income over $200,000 (or joint income over $300,000 together with a spouse) for the past two years with the expectation of the same income value in the current year

In Canada, a person alone (or together with a spouse) has to own $1 million in financial assets; or net worth (individual or joint if married) over $5 million; alternatively, an individual’s net annual income before taxes has to be over $200,000 (or $300,000 together with a spouse) in the two most recent years with the expectation of the same income value in the current year

In the UK, to become a high-net-worth investor, a person has to earn at least 100,000 GBP a year or have at least 250,000 GBP in assets (regardless of the individual’s primary residence, insurance, and pension policies).

In the EU, a person who has carried out transactions of significant size on the relevant market at an average frequency of 10 per quarter over the previous four quarters. Also who has a financial portfolio exceeding EUR 500,000 or have has worked in the financial sector for at least one year.

Who are non accredited investors?

Non-accredited investors are everyone who doesn’t fall under the requirements listed above. In media, it is common to call them ‘retail investors’. Retail investors operate with a help of traditional brokerage or online trading platforms like E-Toro or Robinhood. The main difference with institutional investors is the capital under management.

Despite the small investment capital, retail investors have a significant impact on market sentiment. The dramatic rise of Tesla or Bitcoin recently has shown how far retail investors can push the price of an asset. And the most dramatic case of GameStop has made institutional investors get a little nervous about the power that retail investors have. At the same time, professional traders accuse retail investors of lack of knowledge, discipline and expertise to manage investments. The power of retail investors works in another way too. Because of the higher emotional factor, retail investors are more likely to cause a panic sell-off.

Access to pre-IPO

Regulators have banned non-accredited investors from investing in private equity for their own financial well-being. Since private companies do not disclose their activities, such investments are considered highly risky. Meanwhile, funds and large banks have access to all kind of information, since companies are ready to share it only with potential investors.

At the same time, would you consider investment in SpaceX as a risky one? Investments in companies with multi-billion valuation sounds like a great deal. Especially when a start-up already transformed into a big corporation with a lot of trustworthy partners, clients or users.

But still only accredited investors can purchase shares of large-cap private companies like SpaceX, Revolut or Klarna. Moreover, the minimum entry ticket is varying from 100k to 300k USD, which is out of reach for retail investors. Thankfully, with a help of blockchain technology, it is now possible to purchase units that track the economic interest in shares of private companies with just 100 EUR.

However, it is worth noticing, that when you purchase a share in a private company on a blockchain you do not become a direct shareholder of this company, and you wouldn’t find your name in the register (table of investors). Read more about how it works in the ultimate guide to pre-IPO investing.

Moreover, private companies tend to stay private for longer, which makes the PE market more and more attractive to investors. The private equity marketplace for retail investors is going to disrupt the industry the same way Robinhood did with the stock market. The GameStop case has shown how strong retail investors could be.

GameStop story

In January 2021, a group of investors created a s/Reddit to share news, analysis and investment ideas. At one point they noticed that a stock of the video game retail store named GameStop is highly shorted by several hedge funds. Meaning that some institutional investors are betting a lot of money on the depreciation of the share price.

The decision was to pool their money and create long positions to achieve a process called ‘short squeeze’. A short squeeze occurs when a stock increases high enough, forcing traders who had bet that its price would fall, to buy it in order to prevent even greater losses. The first bulk of liquidation pushes the price to go even higher and forces the next bulk of short positions to be liquidated as well. Basically, the concept is similar to the domino effect which pushes the price further and further.

The main requirement to create short squees on a market is to find a stock or an asset that has more short positions than long ones. And that exactly was the case with GameStop, and the group of nearly 100 traders were able to manipulate the market. Initiation of short squeeze made the price of GameStop share skyrocketing by almost 800% in just one week. Some of the hedge funds were even extremely close to bankruptcy, while trades from the Reddit army have earned millions of dollars.

GameStop scandal became a great example of how retail investors can manipulate the market against big shots from Wall Street.

Private Equity

Rasion marketplace is the first step in the democratisation of a very closed and unapproachable private equity market, the same as the stock market was several years ago. With evolving technologies and proper regulation, the PE market will welcome more and more retail investors.

Thanks to blockchain technologies, investors already do not need accreditation and the pile of money to benefit from the growth of large-cap private companies. On the Raison marketplace, it is already possible to create a portfolio of PE companies like SpaceX, Airbnb, Robinhood, Klarna and many others.

Download Raison App and find private equity companies on our marketplace!