How to Buy Stocks Before They Go Public

Buying shares in a company before it becomes publicly traded is known as pre-IPO investing. This allows investors to gain an ownership stake during a company’s private growth phase, potentially before its valuation significantly increases. It offers a different pathway to participate in a company’s financial trajectory than purchasing shares on public markets.

Accredited Investor Status

The U.S. Securities and Exchange Commission (SEC) has established specific criteria for individuals and entities to qualify as an “accredited investor.” This classification is important because many private investment opportunities are legally restricted to this group. For individual investors, one common way to qualify is by demonstrating a consistent annual income exceeding $200,000 for the past two years, or a combined income with a spouse or spousal equivalent over $300,000 for the same period, with a reasonable expectation of maintaining that income level in the current year. Alternatively, an individual can qualify by having a net worth exceeding $1 million, either individually or jointly with a spouse or partner, explicitly excluding the value of their primary residence.

The SEC established this classification for investor protection, ensuring individuals investing in unregistered securities can assess risks or absorb potential losses. Qualification also includes certain professional certifications, like Series 7, Series 65, or Series 82 licenses, or serving as a director or executive officer of the issuing company. While not universally required, accredited investor status is a common prerequisite for many private opportunities.

Investing Through Equity Crowdfunding Platforms

Equity crowdfunding platforms offer a distinct avenue for individuals to invest in private companies, often allowing participation from both accredited and non-accredited investors. These platforms operate under specific SEC regulations, primarily Regulation Crowdfunding (Reg CF) and Regulation A (Reg A+). Reg CF permits companies to raise up to $5 million within a 12-month period by selling securities to a broad base of investors through SEC-registered funding portals. Non-accredited investors under Reg CF are subject to investment limits based on their annual income or net worth, typically allowing them to invest up to the greater of $2,200 or 5% of the lesser of their income or net worth, with a maximum of $107,000 in a 12-month period for those with higher incomes or net worth.

Companies on these platforms create detailed profiles, including business plans, financial statements, and risk discussions. Investors create an account, browse offerings, and commit funds through the platform after evaluation. Legal documents are signed online. Companies generally provide annual updates and disclose material changes to keep investors informed.

Regulation A (Reg A+), also known as a “mini-IPO,” provides another framework for companies to raise larger amounts of capital, up to $75 million in a 12-month period under Tier 2. While Reg A+ offerings are open to both accredited and non-accredited investors, non-accredited investors in Tier 2 offerings are generally limited to investing no more than 10% of the greater of their annual income or net worth. Companies pursuing Reg A+ offerings must provide audited financial statements and are subject to ongoing reporting obligations with the SEC.

Accessing Private Company Shares via Secondary Markets

Secondary private markets offer another way to acquire pre-IPO shares. These platforms or brokers facilitate the buying and selling of shares from existing shareholders, such as early employees or venture capitalists seeking liquidity. These opportunities are typically available to accredited investors due to the complex nature and reduced liquidity of private securities.

To participate, an investor identifies and accesses reputable secondary market platforms specializing in private equity. Examples of such platforms include Forge, Hiive, Linqto, and Nasdaq Private Market’s SecondMarket. The process often involves browsing available shares, which may be listed with an asking price, or placing a bid for desired shares. Due diligence on the target company and the specific share offering is crucial, including understanding the source of shares, share class, and any transfer restrictions such as company approval or lock-up periods.

Transactions on these platforms involve a legal transfer of shares, which can be lengthy despite streamlining. Liquidity in secondary private markets is significantly lower than public markets, making quick sales at a desired price challenging. While platforms provide data, direct negotiation between buyers and sellers is common.

Understanding Special Purpose Acquisition Companies (SPACs)

Special Purpose Acquisition Companies (SPACs) offer another path for investors to gain exposure to private companies before they go public. A SPAC is a publicly traded shell company formed to raise capital through an initial public offering (IPO). Its sole purpose is to acquire or merge with an existing private company, allowing that company to become publicly traded without a traditional IPO.

Investors can engage with SPACs by purchasing their shares, which trade on public exchanges under a ticker symbol, much like regular stocks. Typically, SPAC shares are initially offered at a par value, often around $10 per share, and may include warrants that provide the right to buy additional shares at a fixed price later. After the SPAC’s IPO, its management team searches for a suitable private company to acquire, usually within a specified timeframe, often 18 to 24 months.

Once a target company is identified, the proposed “de-SPAC” transaction is announced and requires shareholder approval. If approved, the SPAC merges with the private company, converting original SPAC shares into shares of the newly public operating company. Investors who bought SPAC shares before the merger then own shares in the operating business.