There exist multiple risks when investing in pre IPO enterprises. This is not to say that all these offers will fail to produce a return, or are fraudulent. This is the way that capital is raised for legitimate new companies. By exercising due diligence before purchasing a stake in a successful company, double or triple digit returns on investment can sometimes be realized.
Before a company can go public it must be viable. Capital for start up must be raised by the promoters of the new idea or company. The initial investors supplying that capital have a ground floor opportunity to make large profits, or maybe loose their money.
Some apparent offers are not real investment opportunities. They are criminal enterprises designed to fraudulently extract money from the investor. Legitimate investment opportunities are registered at the Securities Exchange Commission unless exempt under the rules.
Offers that come from strangers, or are not sought out, should be approached with the highest caution. Those that come to a potential investor by way of the internet, e-mail, telephone, or in person need to be looked at with skepticism.
These opportunities are only available, under SEC regulations, to sophisticated investors, or to qualified investors with a net worth of $1 million, exclusive of their primary home, or with annual income of $200,000 for the current and two previous years.
A first step in the potential investors’ research will be to contact the securities regulator in their state to see if the registration requirements have been satisfied. This is also where additional information can be found regarding the company’s history, the offering, and any prior promoter disciplinary history.
Due diligence should include investigating whether the company is a going concern. Find out what real products or services it offers, and whether you can understand them. See whether a physical plant exists, if there are customer contracts, and if they have an inventory. Obtain independently audited financial statements and evaluate them thoroughly. Determine whether the management is qualified for the job, and if they have made money for companies in the past. Also find out if they have been involved in violations of any laws, especially securities laws, or defrauding of investors.
Make sure there is an underwriter. This should be a real investment banker. It should be free of past complaints, or any record of fraud.
Another important consideration is whether there are time restrictions on the reselling of the shares. A lock in period is meant to attract long term investors. Any restrictions on the ability to liquidate can be revealed by checking with the SEC Public Reference Room Circulars filed under Regulation A or Regulation D, Form D.
Finally be warned that the pre IPO may never go public. Not all such investments will pay out. Hence the substantially lower subscription price, below the eventual public offering price. Remember also that the fair market valuations will be speculative and sometime hard to determine accurately. These investments are available only to those who qualify as accredited or sophisticated investors.
Are you interested in IPO investments? You can find more information about Pre IPO’s and their many benefits right here.