Do you want to make money buying IPO stocks before they go public? If YES, here is a complete guide to investing in IPOs, pre-IPOs and private placements online.
For a business to grow and succeed, capital is needed. When a company is about to start, the founder may borrow or source for loans to startup his company; however, as the business improves and flourishes, the need arises to source for funds via other means. This can be achieved through a number of ways including an IPO and a private placement.
When a company needs to raise money, they can do it in the private market as opposed to the public market. The private market affords them the advantage of obtaining the fund they need faster and also helps them to avoid certain fees. If they raise the money privately, they can avoid having to register the sureties and also avoid having to file a prospectus.
By avoiding the aforementioned, they are able to get capital from investors into the coffers of the company at a much faster rate than would had been possible had it been raised publicly. This is the idea behind private placement.
Table of Content
- What is Private Placement or Pre-IPO?
- What is Initial Public Offering (IPO)?
- Private Placements vs Public Offerings – What’s the Difference?
- Investing in Pre-IPOs and IPOs – What are the Requirements for Investors?
- Tips for Investing in IPOs Online
- Tips for Investing in Pre-IPOs and Private Placement
- When is the Right Time to Sell your IPOs and Private Placement Shares?
What is Private Placement or Pre-IPO?
A private placement is therefore a means of raising capital that involves offering up for sale unregistered sureties to a particular number of investors. Warrants, otherwise known as bonds and shares are stock of the company that are exchanged for cash.
In the united states of America, even though all placements must adhere to the securities act of 1993, the securities that are offered in a private placement do not have to be registered with the Securities and Exchange Commission. However, the issuance of securities must be in line with an exemption from registration as stated in the securities act of 1993.
What is Initial Public Offering (IPO)?
Initial public offering (IPO) otherwise known as stock market launch is when a private company gets their private shares and make some available to the world for the very first time. They are basically saying “we have gone public, we are open to business and you guys can purchase our shares”.
A study in 2016 showed that the United States private placement raised $50 billion, while, IPO’s raised up to $85 billion according to data compiled by Ernest and Young.
Investing in IPOs and Pre-IPOs Online Before It Goes Public – A Complete Guide
How Does Private Placement Work?
In a private placement, you fund a company directly and they issue the securities to you; so they become the issuers. You can then contact someone who is in a managerial position or a director at the company and they will get you the necessary paperwork called subscription documents. Typically, it contains information like what company you are investing in, what the terms of the deal are, and at what price the shares are being issued if there is a warrant and the terms of the warrant if there is one.
In an IPO, a company sells a fraction of their company to the public. The company does this by selling its stock to one or more investment banks that then performs the role of the underwriter for the offering. The underwriters who are usually few in number will in turn sell their stocks to interested investors in the much larger public market.
An underwriter takes a risk in that he believes that they will be able to sell the stock purchased from the company. As such, the company compensates them by way of fees and underpricing of the stock that the company sells them. The underwriter then sells at a much higher price.
Private Placements vs Public Offerings – What’s the Difference?
Even though an IPO and a private placement share a few similarities, to a large extent they are very different. Firstly, investors in private placement are usually pension fund, mutual funds, large banks, insurance companies. That is, they are usually open to accredited investors by way of options. IPO’s however are open to the general public who have enough funds to purchase shares.
Due to the fact that private placements are only available to only a very small pool of individuals/entities, there is no need for them to be registered with the Securities and Exchange Commission.
IPO’s in contrast had to pass through the stringent procedures of the Securities and Exchange Commission. Furthermore, an IPO requires the services of an underwriting firm which is tasked with determining the time to bring to market, best price for offering, and what type of security to issue.
Investing in Pre-IPOs and IPOs – What are the Requirements for Investors?
For a private placement, in most cases, you will need to be an accredited investor in other to participate in these deals and there are various ways you can meet the requirements to be an accredited investor.
The first is net worth. Here you are required to have a net worth of one million dollars (excluding your place of residence) or if you are an individual who makes more than $200,000 annually for two consecutive years in the past and expects to get the same or more in the current year. For married couples however; the sum will be $300,000.
Individuals who are non-accredited investors can also partake in a private placement. According to rule 505 and 506 of the securities act of 1933 regulation D, a small placement of 35 people who are considered as non-accredited investors who have an organization that has exceeded the limit of five million dollars for a period of twelve months in private placements can also take part.
In most IPO’s, members of the general public with enough money can purchase the shares. However, some IPO’s are not open to the general public. The underwriting firm decides what category of people whom they may allow to invest in the IPO. There are three categories of applicants who apply for ownership in an IPO:
- Retail individual investor (RII): these are investors who wish to purchase only a small value of share. The general public usually belongs to this category.
- Non-qualified institution investor: when an investor applies for a large amount of shares but cannot be classified under the qualified institutional buyer category, they are said to be Non-qualified institution investors. Examples include companies, NRI’s, trusts and societies etc.
- Qualified institutional buyer (QIB): these are corporations who are considered as being accredited investors in line with the provisions stated in the Securities and Exchange Commission’s rule 501 of regulation D. Foreign institution and investors who are registered with the SEBI are also categorized as QIB.
The underwriters can decide that just one or a combination of all of the aforementioned categories can purchase a particular IPO.
Tips for Investing in IPOs Online
Finding a good IPO can be a daunting and risky business. However, a good IPO investment has some key attributes. Here are some tips to help you when IPO investing.
1. Proper Research
The power of an extensive research cannot be overemphasized when investing in an IPO. One of the ways of doing this is to read the prospectus. IPO prospectuses are usually voluminous and don’t make for a good read, however the information they contain can be quite rewarding.
Your research however has to go beyond reading a prospectus because the prospectus is written by the company and not by a neutral third party as such it can’t be trusted to be unbiased. Search the internet for information about the company’s past, its competitors, finances, etc.
Also, try to research about the general health of the industry. A proper research will give you assurance that you are taking the right decision. Also, you could discover that the information in their prospectus has been exaggerated. Who knows?
2. Get into the IPO Circle
Prospective IPO investors may become frustrated upon the realization that good stock is hard to find and also the IPO for good stock begins and ends rapidly giving prospective investors little or no time to invest. You can get regular info on companies that have the intention of proposing an IPO or who for the meantime are testing their offers with institutional investors in relevant financial magazines and websites. Also, you should consider opening an account with a broking firm that is into the floats you are into and build a relationship with them.
3. Have a Strong Broker
Endeavor to go for companies who have strong underwriters. This is not to say that a good underwriter is a guarantee for success, but quality brokers are much more likely to bring quality companies to the public. Smaller brokerages with little or no reputation may be willing to underwrite any company.
4. Know What your Money Will be Used for
It only makes logical sense to find out what someone intends to do with your money. Study the prospectus and find out what exactly they intend to do with the money realized from the sale of shares. It may be to make new products, diversifying in other sectors, settling debts etc. If it looks promising then, it’s most likely that you are on the right path.
5. Apply Caution
Due to lack of proper information surrounding IPO’s, uncertainty abounds. The fact that they have no history as a listed company also adds a layer of risk to the mix. So, before you buy an IPO, understand the risk that you may face and apply caution.
Tips for Investing in Pre-IPOs and Private Placement
i. Never Tolerate Long Broke Chains in a Private Placement Program
Private placement deals never get done when there are more than four brokers including the program manager and the client rep. This is something that is critical when trying to get a deal done in the private placement business. It is well known that there can be up to ten brokers in some deals.
Now think, even if you close the deal, the pay cheque will not be worth the mediation you will need to constantly perform. The key point to remember is, if you can’t quickly work your way through the chain you will be completely wasting your time.
ii. Only Work with Brokers Who Have Closed Deal Before
Though there may be thousands of people who may claim to have a private placement connection, most of them have never closed a deal. This may be something that they have worked at for years with no success at all. So what is the probability that anything will change? Stay away from such brokers.
iii. Use your Instincts
Never let the money you have been promised blind your decision. Focus on the transaction now and celebrate later. One of the most critical mistakes people make is focusing on the money and not on the private placement transaction at hand. Follow your common sense and not the zeros.
iv. Only Work with Brokers and Traders Who Can Answer your Questions to your Satisfaction: If a broker has problems answering your questions, then it means he or she is less knowledgeable about what he or she is doing.
v. Never Settle for Something That Feels Less than Genuine
There are thousands of people in the private placement program business with only a few hundred of them having any connection to the real opportunity and as expected they are the hardest to find. It is a lot easier to get someone with no past success than to find someone who is rich from past deals. Also a lot of brokers when the try to sell to you exaggerate the possible returns. The fact still remains that they are not supposed to sell or offer private placements. They are strictly based on invitations. So don’t fall for scammers.
vi. Always Follow Non-solicitation Laws and Never State or Guarantee the Expected Return
All private placement programs are based upon a best effort basis and the state guarantees returns. If you speak to someone and they tell you that they can guaranteed high returns just cut them off. He/she has most probably not closed a deal in the private placement business and they do not understand the non solicitation laws. If you contravene this non-solicitation law, you can be thrown into jail.
This million dollar question is the most confusing yet one of the most important questions to ask when buying an IPO or a private placement. Basically for private placements, when you are satisfied with your gains, you can take the profits. If you have warrants that you can hold while you exercise your shares, you can take the gains off the table and hold the warrants for additional upside.
For IPO’s, the dilemma is whether to sell the shares at the first opening price or to hang on and wait for the stock to increase in value with time. More often than not, knowing the right decision is a coin toss.