image source: depositphotos.comJust a few days before Alibaba issued an IPO, its shares were selling below $60 per share. On the first day of trading, the price skyrocketed to over $90 giving the Pre-IPO investors a return on investment of at least 48% percent.Likewise, Facebook is known to have made a fortune for its pre-IPO investors when it finally decided to go public.
According to a report by SecondMarket, Facebook shares were selling at $3.50 each, six years before the public sale. Just before the company filed for an IPO in April 2014, the price per share jumped to $42.72.Without a doubt, the high growth rate of private companies preparing to go public presents the best capital gains opportunity for investors.
But even so, these opportunities are not open to everyone and also come at high risk for the investors who access them.According to the SEC, private companies are only allowed to sell their shares to accredited investors. These are investors with a demonstrated net worth of $1 million and above or a yearly individual income of $200,000+ (or $300,000+ and above for couples).
Also, an investor can be considered as accredited if they are licensed or registered by the SEC as a broker or investment advisor. This means that if you decided to invest in high growth rate private companies such as UBER, Spotify, Dropbox or Airbnb today, you would need to meet the above thresholds.Most investors do not qualify as accredited and therefore the opportunities presented by these companies are usually not an option for them.Even for the accredited investors, the investment into the Pre-IPO markets is not without significant risks.
These markets are highly illiquid so the investor cannot dispose of shares before the public sale.When an accredited investor enters into a pre-IPO placement agreement, they commit to holding on the shares until the issuing company floats them in the stock exchange. This can take up to 10 years which means that that the investor’s capital is pretty much tied up until then.The Stock Tokenization SolutionAs we have seen, Pre-IPO investments are not only out of reach for most investors, but even for the few who can access them, they come with high liquidity risk.Stock tokenization, which refers to converting traditional company shares into cryptocurrencies, is offering to bring liquidity into the Pre-IPO markets while ensuring accessibility to all investors interested in private equity.For instance, a blockchain solution known as TheElephant has introduced a solution where the holders of private company shares can convert them into tokens which can instantly trade for cash. Read more from hackernoon.com…
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