If you are in the stock market from longer duration, it’s possible that you might have come across the term “Pre IPO shares”. ‘If you are wondering what the ‘Pre IPO shares” and how you can invest in them are, you are at the right place!
In this article, we will explain to you all about “Pre IPO shares”, how you can buy them and what their benefits are.
What are “Pre IPO Shares”?
Many companies offer their shares to the employees, investors and key officials before the company goes public via IPO process. These shares are known as “Pre IPO shares”.
Companies offer these shares for various reasons, the primary reason being employee retention. Many of these shareholders are keen to sell their stocks, even before the company goes Public.
How can you Invest in “Pre IPO Shares”?
As these companies are yet to be listed on the market, there is no regulated mechanism to buy or sell “Pre IPO shares”. In general, it is done through various dealers who act as a mediator. These mediators are connected with keen sellers and keen buyers. So they play a crucial role in these type of trades.
Are “Pre IPO Shares” are Risky as an Investment Option?
When you are looking for an investment option in the market, there is nothing as “entirely safe!” Investment in well-known brands and companies is also risky. Even Big-shot banks are not immune to investment risks. Yes bank is a good example!
‘Said that, when you invest in publicly listed companies, their operations are more transparent. Regular AGMs gives an insight to the investors in how the company they have invested in operates. They have to stay compliant with regulatory norms of the Government and SEBI.
On the contrary, you don’t get these advantages when you buy “Pre IPO shares” and invest in the companies that are not listed on the stock market. They are not obliged to make their financial transactions and business operations Public. So, yes, they are risky. There is no doubt about it.
But remember, the ultimate rule of Investments, “Higher the risk, higher the return!” Imagine how rewarding it could be to invest in some promising startup that is yet to be listed on the market!
There are many excellent companies with efficient management and high growth potential. Investing in them is a risk worth taking!
What are the Benefits of Investing in “Pre IPO Shares?”
The primary and most crucial benefit of investing in these types of shares is that you can get them at considerably lower rates. If the company performs well and launches its IPO, the listing price goes well above your investment price.
The secondary benefit is getting a hand on these shares once they are listed through the IPO-process. As you know, the allotment of shares is done on a lottery basis. When the company is performing well, and IPO is promising, it gets subscribed multiple times.
In such cases, it becomes difficult to get the allotment. But if you have “Pre IPO shares”, there is nothing to worry about!
Moreover, investors get an opportunity to invest in companies that are limited to large investors. Time and again, it happens that when an IPO is listed, it opens considerably higher than the “Pre IPO levels”.
In a nutshell, it’s an excellent opportunity for an investor to get a hold on some good shares before they get listed and soar high.
‘Things that one should keep in mind before investing in “Pre IPO shares”.
- Vesting period
Whenever a company offers ‘Pre IPO shares” to its employees, there is always some vesting period. The vesting period is a minimum time for which the employee has to be a part of that particular company to get the hold of these shares.
For e, e.g. if some company has a vesting period of 12 months and employee leaves after ten months, the employee will have no right on these shares. They will go back to the company.
The vesting period can be as low as six months to as high as two years; there is no bar on it.
So before buying these shares, an investor should ensure that the shares are fully vested.
- Lock-in for these “Pre IPO shares.”
To prevent the high fluctuation in the initial stage of launching an IPO, SEBI has mandated that the “Pre IPO share” holders can sell their stocks only after one year of listing.
Still, these shares can be bought and sold by filling Delivery Instruction Slip.
- No regulatory body
As mentioned above, trading of these stocks is not monitored by any regulatory body. So, anything goes wrong! All these trades solely depend on the credibility of the dealer.
Hence, it’s vital to have a dependable dealer as a mediator while trading in these stocks.
- Longer time to the listing
There is no guarantee that once you buy these shares, the company will launch its IPO, and you will generate a good profit! Even in normal circumstances, the IPO process takes around 10 to 12 month to fall in place.
There can be several obstacles in the way of launching the IPO that can delay the launch.
Should you Invest in “Pre IPO Shares”?
Well, it depends on multiple factors. Investing in these shares is obviously risky. There are many cons that come with these shares. But, the number of pros might outweigh the cons in many cases!
So if you have an appetite for the risk and if you find some promising company, surely go for it.
But if you are a cautious investor who doesn’t want to put their hard-earned money at risk, stay away from them.
Final Thoughts
Investment in these shares is not transparent. So the investors need to be quite a vigilant while investing. The process includes multiple negotiations about price and payment terms via dealers. As these dealers are not considered in size and are not entirely safe, it’s critical to stay vigilant while investing.
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