10

Say there's a company which is known with certainty to be doing very well, but is privately held and is expected to go public within a few years. When such companies do investment rounds, are the only people permitted to participate those with high net worths?

Is there any way to invest in companies pre-IPO without being quite wealthy?

(And without just getting a job at the company that comes with stock options.)

| improve this question | |
  • 1
    Have you seen this question? – John Bensin May 29 '13 at 2:30
  • 2
    Yes, but I knew that. I'm particularly interested in pre-IPO stock, not during-IPO stock. The downvote is very confusing to me. – temporary_user_name May 29 '13 at 2:36
  • 2
    Agreed, different enough. This is a unique question. This question is actually asking how one can buy shares of stock in pre-IPO companies, or those that are still private. – JTP - Apologise to Monica♦ May 29 '13 at 2:54
  • 1
    @Aerovistae Not my downvote, but fair point; your question is referring to an earlier timeframe. – John Bensin May 29 '13 at 11:08
  • 2
    I love how a questions with 6 upvotes, a favorite, and two productive answers has three close votes. What the #$^&? How do you justify that? – temporary_user_name May 31 '13 at 20:50
20

Short answer: No. Being connected is very helpful and there is no consequence by securities regulators against the investor by figuring out how to acquire pre-IPO stock.

Long answer: Yes, you generally have to be an "Accredited Investor" which basically means you EARN over $200,000/yr yourself (or $300,000 joint) and have been doing so for several years and expect to continue doing so OR have at least 1 million dollars of net worth ( this is joint worth with you and spouse).

The Securities Exchange Commission and FINRA have put a lot of effort into keeping most classes of people away from a long list of investments.

| improve this answer | |
  • 8
    +1 - I'd only add, it's typical for even low wage workers of the company to get shares as part of their pay package. Many who worked at Google even as janitors were rich after the IPO. – JTP - Apologise to Monica♦ May 29 '13 at 4:12
  • 3
    It would be useful to add that there are good reasons for the SEC to keep the everyman out of pre-IPO purchases. First and foremost, if that were allowed, then the date/time when it is allowed basically is the IPO. Second, dramatically increased volume and volatility in the pre-IPO period would make institutional investors wary, and when the big guys get shaky, that's when the market takes a dump. While we generally view "insider trading" among the well-heeled as a bad thing, in this instance it's actually a stabilizing measure. – KeithS May 31 '13 at 18:42
  • 5
    @KeithS everything the SEC does to "protect investors" and "maintain market integrity" has questionable utility. So I try to avoid talking about all the useful-ish things to add, because we could talk about this all day. – CQM Jun 2 '13 at 14:55
  • Note that, that $1 million in net worth can't include the value of your house. – user11599 Dec 2 '15 at 21:58
8

No you don't have to be super-rich. But... the companies do not have to sell you shares, and as others mention the government actively restricts and regulates the advertising and sales of shares, so how do you invest?

The easiest way to obtain a stake is to work at a pre-IPO company, preferably at a high level (e.g. Director/VP of under water basket weaving, or whatever). You might be offered shares or options as part of a compensation package.

There are exemptions to the accredited investor rule for employees and a general exemption for a small number of unsolicited investors. Also, the accredited investor rule is enforced against companies, not investors, and the trend is for investors to self-certify. The "crime" being defined is not this: investing in things the government thinks are too risky for you. Instead, the "crime" being defined is this: offering shares to the public in a small business that is probably going to fail and might even be a scam from the beginning.

To invest your money in pre-IPO shares is on average a losing adventure, and it is easy to become irrationally optimistic. The problem with these shares is that you can't sell them, and may not be able to sell them immediately when the company does have an IPO on NASDAQ or another market. Even the executive options can have lock up clauses and it may be that only the founders and a few early investors make money.

| improve this answer | |
4

There are a couple of ways to buy into a private company. First, the company can use equity crowd funding (approved under the JOBS act, you don't need to be an accredited investor for this).

The offering can be within one state (i.e. Intrastate offerings) which don't have the same SEC regulations but will be governed by state law.

Small companies (small assets, under $1 million) can be made under Regulation D, Rule 504. For assets under $5 million, there is Rule 505, which allows a limited number of non-accredited investors. Unfortunately, there aren't a lot of 504 and 505 issues.

Rule 506 issues are common, and it does allow a few non-accredited investors (I think 35), but non-accredited investors have to be given lots of disclosure, so often companies use a Rule 506 issue but only for accredited investors.

| improve this answer | |
0

There are some new fundamentals related to this question.

For instance, mutual funds have begun investing in companies before the IPO.

And the Softbank holding company has funds for accredited investors that invest in companies before the IPO. However, anyone can invest in the Softbank company itself.

Finally, non-accredited investors can invest in small private companies under SEC rule 504. That's a very small company because investment is currently limited to a total of $5 million every 18 months.

Also, there are crowd-funding laws that lighten-up on the traditional SEC rules.

| improve this answer | |

Not the answer you're looking for? Browse other questions tagged or ask your own question.