The Good and Bad of Pre-IPO Investing

January 14, 2020

People who want to put their money into pre-IPO stocks often fact very basic obstacles. Two of the most common are the lack of worthwhile opportunities and the difficulty of learning about the companies making the offers. There’s more to the process than that, but anyone who intends to enter this marketplace should know about the most common pros and cons of pre-IPO investing. No, the endeavor is not for everyone, but the few who do partake stand to earn outsize returns on their money. Here’s a quick rundown of the good and bad.

Pro: Potentially High Returns

Returns can be greater than 1,000 percent on a decent investment of this kind, which is why so many people gravitate to them in the same way that millions of people become fascinated with gold. The reason for such high potential returns is that corporations in this phase of money-raising are often desperate to get past a common hurdle. Many new, smaller organizations that begin to succeed are primed for major profit-taking but lack the financial resources to hire key staff or build essential production space.

The solution is to offer low-cost shares to a small pool of potential investors. If the management team is able to raise the needed funds, and the success continues, those early investors, who took a chance even before the initial public offering, stand to make enormous profits.

Con: Time Commitment

If you want to put your hard-earned cash into a company that isn’t even listed on the stock exchange yet, you’ll need to do a lot of research. If you’re looking to make a decent-sized profit, you’ll want to know more than the names of the management team and what the product or service is. That typically entails getting hold of detailed financial reports and reading them with close attention. For example, the cannabis industry has lots of pre-IPOs right now, but few investors know what to look for in a financial statement of such a company. One way to overcome this obstacle is to enlist the help of a trained accountant to help you scope out good opportunities.

Pro: Investors Can Find Lots of Choices

There are services for investors who are searching out these kinds of high-risk, high-reward companies. One reason it’s so tough to ferret out opportunities is that many of the companies making offers are tiny and only announce their fund-raising efforts to a close circle of people in their network. But if you want to take advantage of this form of investing, check one of the many online forums on the topic and find a company that meets your criteria.

Con: No Prospectus or Broker

There won’t be a prospectus to look at, nor will you be able to buy into a pre-public offering via a licensed broker. You’re on your own when you choose a company that is not listed on an exchange. Think of it as lending money to a friend who has a great idea for making a go of things with a new corporation.

Pro: Costs of Investment Can be Low

One of the upsides to these unorthodox forms of investing is the low cost. If you find something that interests you, it’s usually possible to get in for a very low initial investment, but only if the listing is crowd-funded.

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