How to Invest in Startups Before IPO

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How to Invest in Startups Before IPO

If you’ve heard that investing in startups before their initial public offering (IPO) can be lucrative, you’ve heard correctly. This article explains how even investors with only $100 can invest in start-ups since the JOBS Act was passed in 2012.

How Do You Invest in Pre-IPO Shares?

Prior to 2012,  pre-IPO investing was only available to accredited investors, private equity firms, hedge funds and a few other groups. But in 2012, then-President Barack Obama signed the Jumpstart Our Business Startups Act, or JOBS Act into law. The JOBS Act made it easier for private companies to raise capital and stay private longer, and then to go public. Additionally, the JOBS Act:

  • Increased the number of shareholders a company can have before it’s required to register common stock with the SEC to 2,000;
  • Allowed up to 500 unaccredited shareholders in a private company;
  • Allowed different forms of equity crowdfunding with a limit of up to $5 million as of March 15, 2021;
  • Raised the limit for securities offerings under Regulation A from $5 million to $75 million as of March 15, 2021.
  • The JOBS Act went into effect in May 2016 after the SEC adopted the new rules.

Since the JOBS Act went into effect, unaccredited investors (that’s most of us!) have been able to invest in private companies with as little as $100. But how do small investors find pre-IPO opportunities? Here are five ways to invest in Pre-IPO shares:

  1. Consult with a stockbroker or advisory firm specializing in capital raising and pre-IPO shares.
  2. Consult with your local bankers about companies looking for investments.
  3. Monitor the financial news for details about startups or companies looking to go public.
  4. Investigate and follow your favorite startups on websites like AngelList.
  5. Invest through online startup platforms, such as OurCrowd.

What is Pre-IPO Investing?

Also called “angel investing” or “startup investing,” pre-IPO investing provides seed money or operating capital for small businesses at the very beginning or shortly thereafter, before they’ve realized any of their growth potential. While not without risk, pre-IPO investing can make angel investors much more than if they invest in a proven company.

What are Pre-IPO Shares?

Pre-IPO shares are shares in a company that has grown past the risky start-up phase, is earning revenue, and is planning the next step – an initial public offering.  Here is the life cycle of a company and when Pre-IPO shares are available:

Phase 1 – Start up
Phase 2 – Growth
Phase 3 – Maturity – Pre-IPO
Phase 4 – IPO
Phase 5 – Post-IPO Growth
Phase 6 – Public Maturity

Can You Sell Pre-IPO Shares?

Yes, through your broker or online platform, but typically you have to own them for one year. The greatest ROI is usually realized once the company goes public, however. Bear in mind that if you purchase after the IPO, there is a lock-up of 90-180 days during which shares cannot be sold by insiders such as the company’s owners, managers, employees, and early investors.

Should You Invest in Pre-IPO Companies?

Small investors now have access to this market and can use one of the low-cost online platforms to explore pre-IPO investment opportunities. When starting out, risk only the amount of money you are comfortable with losing, and consider any losses the cost of learning to invest in pre-IPO companies.

Why Buying Pre-IPO Shares is Beneficial

When you purchase pre-IPO shares in a company, you are investing in the company after the initial startup stage and in a stage of its development where it is experiencing growth and earning some revenue.

If you work for a small company that is growing and considering making a public offering once it reaches scale, the company might offer you and other employees the chance to invest in it. Who knows better than a company’s employees whether the business will remain viable? But perform your due diligence and be sure to inspect your employer’s financial disclosures prior to investing.

Risks Involved When Investing in Pre-IPO Shares

As with any investment, you risk the company failing to grow, or failing entirely.

How YK Law Can Help You Invest in Startups Before IPO

Our team of private equity and investment lawyers work with both investors and companies seeking investors to reach their goals. We keep our finger on the pulse of technology, energy, life sciences, resources and mining, chemicals, consumer/retail, and industrial markets and can identify current and promising pre-IPO investment opportunities. Call us to discuss your investment goals before you invest.

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