What Is Pre-IPO Placement?

Pre-IPO Placement Explained

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A pre-IPO placement is a private placement of securities by a company that hasn’t yet gone public. These transactions often take place just before a company issues its IPOs, and the investors are often big hedge funds and private equity investors.

Read on to find out how pre-IPO placements work, the pros and cons, and how to participate as an individual investor.

Definition and Examples of Pre-IPO Placement

A pre-IPO placement occurs when a company offers the sale of private securities just before the company goes public. It’s a type of private placement in which companies often sell shares to private equity and hedge fund investors at a rate that is lower than the planned IPO price.

As a way to entice investors to participate in pre-IPO placements, companies often promise high returns by getting you in on the ground floor and before public investors are invited to participate.

A prominent example of a pre-IPO placement occurred in 2019 when PayPal agreed to buy $500 million of Uber common stock leading up to Uber’s IPO.

How Pre-IPO Placement Works

A pre-IPO placement is a type of private placement, which means the company issues unregistered securities. Due to Securities and Exchange Commission (SEC) regulations, the securities in private placements are usually only available to accredited investors. An accredited investor can include:

  • An individual with an income above $200,000 (or $300,000 with a spouse)
  • An individual with a net worth of $1 million, either alone or with a spouse
  • An individual with a Series 7, 65, or 82 license in good standing
  • A trust with assets above $5 million
  • An entity with investments above $5 million
  • An entity where all equity owners are accredited investors

The shares the company sells in a pre-IPO placement are different from those you’d buy on a traditional stock exchange because they’re unregistered. In other words, the company didn’t have to register them with the SEC, nor did it have to file the same disclosures the SEC requires from a publicly traded company.

It’s also important to note that the shares sold in pre-IPO placements often come with restrictions. For example, an investor may be required to hold the securities for at least one year before they can resell them. This restriction applies even if the company goes public in the meantime. Additionally, because the shares’ restrictions are passed on to the buyer, you may have trouble finding someone who wants your shares.

While private placements are a common type of transaction, pre-IPO placements are unique in that they often take place right before a company issues its initial public offering (IPO).

Pros and Cons of Pre-IPO Placement

Pros
  • Potentially higher returns

  • Discounted shares

Cons
  • Typically open to accredited investors only

  • Higher risk

  • No guarantee the company will actually go public

Pros Explained

  • Potentially higher returns: Because you’re buying stock before the company’s shares are available to public investors, you could see greater returns than if you had waited.
  • Discounted shares: Shares in a pre-IPO placement are often sold at a lower rate than the company plans to issue shares during its IPO.

Cons Explained

  • Typically open to accredited investors only: SEC regulations limit private placements to accredited investors, meaning most investors can’t participate.
  • Higher risk: Private placements don’t require companies to register shares with the SEC or provide as much public information. As a result, these pre-IPO placements can result in higher risk for investors.
  • No guarantee the company will actually go public: While a pre-IPO placement is often done just before the company goes public, there are no guarantees the company will go public.

What It Means for Individual Investors

As an individual investor, you probably don’t qualify to participate in a pre-IPO placement. First, because the securities in question are unregistered, these deals are only available to accredited investors. Additionally, as we can see in the example of Uber selling pre-IPO shares to PayPal, these transactions often take place as private deals rather than in a public marketplace.

If you aren’t an accredited investor, be skeptical if you’re approached about investing in a pre-IPO placement. There are known scams where companies offer pre-IPO shares to individual investors.

A company advertising or selling unregistered shares to investors who aren’t accredited is illegal.

If you are an accredited investor and are given the opportunity to invest in pre-IPO shares, be sure to do your homework before investing. Because the company hasn’t gone public yet, it isn't required to file the same disclosures as companies that have already gone through an IPO. Learn as much as you can about what the company sells, who is on its management team, and who is underwriting the pre-IPO offering.

Additionally, because the shares are unregistered, you may run into liquidity issues. Unlike publicly traded shares, it can be difficult to sell unregistered shares.

Key Takeaways

  • A pre-IPO placement is when a company issues unregistered securities to accredited investors, often right before issuing an IPO.
  • Pre-IPO placements are a type of private placement, meaning they’re only open to high-net-worth individuals and organizations.
  • While pre-IPO shares can be sold at discounted rates and may result in higher returns, they also result in more risk for the investor.
  • Shares in a pre-IPO placement are unregistered, meaning they can’t be easily resold to other investors in a public market.