A pre-initial public offering (IPO) placement refers to private sale of large blocks of shares before that particular stock gets listed on stock exchange. Buyers principally include private equity firms, hedge funds, and other institutions who show their interests in purchasing significant stakes in the company. Because of the size of such investments and risks involved, buyers in pre-IPO placement tend to get a discount from the price which is stated in prospectus. From the company’s standpoint, such placement is a way to seek funds and offset risks involved in the IPO.
As a pre-IPO investor, an individual gets a chance to become a prominent stakeholder in the company's growth story. Therefore, there are chances to make significant gains when the company eventually lists on a stock exchange. Pre-IPO is a commonly-used method by several companies or stock promoters. They indulge in such a process to improve their capital base before launching an IPO process. Pre-IPO investing allows an investor to enter a start-up at the ground floor level.
From the buyer's standpoint, the price per share is a discounted one in comparison to the expected IPO price. However, the investor cannot know the price which the market will eventually pay. More often than not, purchase is made without a prospectus. There is no guarantee that public listing will take place. For these uncertainties, the company tends to offer a discounted price. Investors in such a purchase have high net worth and solid knowledge about financial markets. To protect itself, the company does not want such private buyers to immediately sell all their holdings if the stock price surges once it opens on an exchange. Therefore, there is a lock-up period attached to such investments to prevent the buyer from selling shares.
Earlier, pre-IPO investing was allowed for high-net-worth individuals, FIIs, and DIIs. However, now even retail investors can participate in pre-IPOs. However, retail investors are advised to invest according to their risk profile and financial capability.
Since pre-IPO is provided by unlisted company, there might not be regular buying or selling. Securities of unlisted companies are sold through brokers. Therefore, both buyers and sellers are dependent on inputs from the broker. In case of the scarcity, individuals might find it difficult to buy or sell shares. Therefore, individuals are required to consider the liquidity factor before investing in pre-IPO.