We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What Are Pre-IPO Offerings?

By Ray Hawk
Updated: May 16, 2024
Views: 12,161
Share

A pre-IPO offering is when a company offers shares of stock to an investor or investment group prior to it actually going public and making shares available publicly. Such stock deals are usually offered to large investors, hedge funds, or investors with seats on the board of directors of the company at a significantly reduced price to what the initial public offering (IPO) share price will be for a couple of reasons. When large investors buy into a company early, it can encourage buying of the stock immediately after it goes public. The advantage to pre-IPO investors is that significant financial gains will be made if the stock sells for a higher price once it is available to the public.

There are several downsides to getting involved in a pre-IPO offering. The risk is very high due to the fact that the company has no legal obligation to go public after making a pre-IPO offering, which means that the shares would have little to no value if the company failed to attract sufficient interest to engage in an IPO. The pre-IPO stock then becomes illiquid, meaning it is virtually impossible to sell or covert to cash. There is also usually a lock-in period with pre-IPO stock where it cannot be sold for a certain amount of time after the company goes public. If the stock price drops after being offered to the public, the pre-IPO share price might end up being higher than the market price, resulting in a net loss for the investor.

The Securities and Exchange Commission (SEC) in the United States, which enforces federal securities laws, warns against pre-IPO company investments. Marketing of pre-IPOs to the general public is often fraudulent, enticing investors by offering a high rate of return on a company that is financially unstable, fictitious, or not legally registered with the SEC. As well, pre-IPO offerings that have been successful in the past typically offer double- or even triple-digit returns. This sort of performance in a narrow section of the securities market attracts all types of scam artists who promise the same or better returns.

Whether choosing to invest through a standard initial public offering or a pre-IPO, the SEC recommends that any investor take several concrete steps to investigate the company before doing so. This includes checking into whether the securities are listed with a state securities regulator, and how the stock may be restricted by lock-in periods. A detailed analysis of the company should also be done, including looking at what products or services it makes, who its core customer base is, and obtaining copies of its financial statements available through its investor relations department. It is also important to find out who owns and runs the company, as these managers will be on record with the state securities regulator if they have defrauded the public in the past.

Share
SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
Share
https://www.smartcapitalmind.com/what-are-pre-ipo-offerings.htm
Copy this link
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.