How to Buy an IPO Before It Goes Public

An Initial Public Offering, or IPO, marks the first time a private company offers its shares to the public on a stock exchange. This transformation allows companies to raise significant capital. For many companies, going public is a major milestone. This transitions a privately held entity into a publicly traded one, opening its ownership to individual and institutional investors.

Understanding IPO Access Channels

Accessing shares in an IPO can be challenging for individual investors. Traditionally, large, full-service brokerage firms provided IPO access primarily to their high-net-worth clients or institutional investors. These opportunities were often limited to clients who maintained significant account balances, typically in the hundreds of thousands or millions of dollars, and engaged in frequent trading activity. This made direct participation largely inaccessible for the average retail investor.

In recent years, some online brokerage platforms have started to offer limited IPO access to their retail clients. This access is typically facilitated through partnerships with the underwriting banks managing the IPO, or through the broker’s own proprietary platforms.
However, this access is often on a “best efforts” basis, meaning there is no guarantee that an interested investor will receive an allocation of shares, even if they indicate interest. The availability of shares through these platforms can vary widely depending on the IPO’s popularity and the demand from larger investors.

While rare for most major IPOs, some companies might offer shares directly to the public through a Direct Stock Purchase Plan (DSP) or a direct offering, bypassing traditional underwriters. These instances are uncommon, especially for high-profile companies, as the traditional underwriting process provides greater distribution and market-making support.
For the vast majority of individual investors, the most common way to acquire shares of a newly public company is to purchase them once they begin trading on the stock exchange, which is known as the secondary market, after the initial offering is complete.

Preparing for IPO Participation

To position yourself for potential IPO participation, the first essential step is to establish a brokerage account with a reputable firm. This typically involves providing personal identification, such as your legal name, date of birth, and Social Security number, along with your address and contact information.
Brokerage firms also require details about your employment status, annual income, and estimated net worth to assess your financial situation and investment objectives, ensuring compliance with “know your customer” (KYC) regulations and suitability requirements. This account will serve as the vehicle for any investment activities, including potential IPO share purchases.

Once your brokerage account is open, it is crucial to ensure it is adequately funded. You can typically deposit funds through various methods, including Automated Clearing House (ACH) transfers, wire transfers, or by mailing a check.
ACH transfers, which are common for electronic funds movement between bank accounts, usually take between one to five business days for funds to clear and become available for trading, though some can be faster depending on the bank. Wire transfers often provide same-day availability for funds but may incur fees from your bank. Having sufficient funds available in your account prior to an IPO opportunity is paramount, as allocations often require immediate funding.

Thorough research into upcoming IPOs is a critical preparatory step. Information about prospective public offerings can be found on financial news websites, IPO calendars maintained by stock exchanges like Nasdaq, and directly through the SEC EDGAR database.
The most important document to review is the company’s prospectus, specifically the Form S-1 registration statement filed with the U.S. Securities and Exchange Commission (SEC). This comprehensive document provides detailed insights into the company’s business model, historical financial performance (including income statements, balance sheets, and cash flow statements), the use of proceeds from the offering, and a thorough outline of associated risks.

Finally, understanding your chosen brokerage firm’s specific rules and procedures for IPO participation is vital. Eligibility criteria can vary significantly among brokers, often favoring clients with higher asset levels or those who generate more revenue for the firm.
Some firms may require clients to meet certain asset thresholds, such as $100,000 or $500,000 in household assets, or be part of premium client groups. It is advisable to proactively inquire about your broker’s IPO allocation policies and whether you need to sign up for specific notifications or programs to be considered for an offering.

The IPO Application and Allocation Process

Once you have completed the preparatory steps and an IPO you are interested in becomes available through your broker, the next phase involves indicating your interest in purchasing shares. This is typically done by submitting an “indication of interest” (IOI) through your brokerage platform.
An IOI is an expression of your desire to buy a certain number of shares at the offering price, but it does not guarantee an allocation and is not a binding commitment to purchase. The window for submitting an IOI is usually open for several days leading up to the IPO pricing.

The allocation process for IPO shares is complex and often favors larger institutional investors or those with established relationships with the underwriting banks. Demand for popular IPOs frequently exceeds the available supply, meaning that individual investors may receive fewer shares than requested, or no shares at all.
Underwriters, who are the investment banks managing the IPO, are responsible for distributing shares and often prioritize clients based on factors like the size of their assets, trading activity, and overall relationship value.

On the day of the IPO, the final offering price is set by the company and its underwriters. This price is determined based on investor demand gathered during the book-building process.
Shortly after pricing, the shares begin trading on a public stock exchange, such as the New York Stock Exchange or Nasdaq. This marks the transition from the primary market offering to secondary market trading, where the stock price will fluctuate based on market forces.

If you are successfully allocated shares, they will appear in your brokerage account, typically on the IPO trading date. It is important to note that even if you receive an allocation, the stock’s market price can move significantly up or down once it begins public trading.
The amount of shares you requested in your IOI does not necessarily influence your chances of receiving an allocation, as many brokers employ a random allocation process for eligible requests to ensure fairness among retail participants.

Life After the IPO

After the initial public offering, the company’s stock transitions to free trading on the secondary market, just like any other publicly listed security. Its price will then be determined by ongoing supply and demand dynamics, company performance, broader market conditions, and investor sentiment.
This means that the stock can experience significant price volatility, particularly in the days and weeks following its debut, which is a normal characteristic of newly public companies.

A significant consideration after an IPO is the “lock-up period.” This is a contractual agreement that prevents company insiders, such as founders, executives, and early investors, from selling their shares for a specified duration after the IPO. Lock-up periods typically range from 90 to 180 days, though they can vary.
The purpose of this restriction is to prevent a large influx of shares from hitting the market immediately after the IPO, which could put downward pressure on the stock price.

When a lock-up period expires, a substantial number of additional shares may become available for sale by insiders, potentially increasing the stock’s float and impacting its price. While not always the case, the expiration of lock-up periods can sometimes lead to increased selling pressure and volatility.
Investors should be aware of these dates and monitor them as part of their ongoing due diligence.

Continuing to monitor the company’s financial performance, news announcements, and overall market conditions remains important for any investment, including those acquired through an IPO.
Regularly reviewing the company’s quarterly and annual financial reports, staying informed about industry developments, and assessing any changes in management or strategy will help you make informed decisions about holding or selling your shares in the long term.