Difference between Pre-IPO and IPO: A Complete Guide for Investors

What is Pre-IPO?

Pre-IPO (preliminary public offering) is the stage preceding an initial public offering (IPO). At this stage, a company raises funds from private investors to prepare for its entry into the public market. The primary goal of Pre-IPO is to strengthen the company's financial position, enhance its capitalization, and minimize risks associated with the IPO.

During the Pre-IPO stage, shares of the company are available to a limited number of private investors, such as institutional investors, venture funds, and accredited private investors. The share price at this stage is typically lower than the anticipated public offering price, making participation in Pre-IPO potentially more profitable, yet riskier.

Key features of Pre-IPO:

• Shares are available to a limited circle of investors.
• A lower valuation of the company compared to the expected IPO value.
• Lower liquidity of shares, as they are not traded on public markets.
• The potential for higher returns through early investment in a promising project.

What is IPO?

IPO (initial public offering) is the process of first offering a company's shares to the public in the stock market. Through an IPO, a company becomes publicly traded, and its shares begin to be traded on an exchange, allowing any investor to purchase them. The primary goal of an IPO is to attract capital from a broad audience of investors and to enhance the company's visibility.

The public share offering is accompanied by stringent reporting and disclosure requirements. The company must provide comprehensive information about its financial performance, risks, governance structure, and other aspects, creating transparent conditions for investors.

Key features of IPO:

• Shares become available to a broad range of investors in the stock market.
• The company undergoes strict regulatory scrutiny and discloses financial information.
• Increased liquidity of shares due to their trading on the exchange.
• Opportunity to raise significant amounts of capital from a wide investor base.

Main Differences Between Pre-IPO and IPO

Now, let's delve deeper into the specific differences between Pre-IPO and IPO:

1. Share Accessibility

   • At the Pre-IPO stage, shares are available only to a limited group of private investors (institutional investors, venture funds, accredited individuals).
   • During the IPO stage, shares become available to anyone on the stock market, significantly widening the investor base.

2. Company Valuation

   • At the Pre-IPO stage, a company is often valued at a lower price since it has not yet undergone the public offering process and may lack transparency.
   • During the IPO, the company's valuation is typically higher as the market accounts for more comprehensive information regarding its operations and growth prospects.

3. Liquidity Level

   • Pre-IPO shares have low liquidity since they are not traded on public markets, and access to them is limited.
   • IPO enhances liquidity, as shares begin to trade on the exchange, allowing investors to buy and sell them freely.

4. Disclosure Requirements

   • At the Pre-IPO stage, disclosure requirements are minimal. The company may provide information only to select investors and is not obligated to publish full financial reports.
   • During the IPO, the company is required to provide complete information about its financial activities, risks, corporate structure, and other aspects, significantly increasing transparency.

5. Risks for Investors

   • Participation in Pre-IPO comes with higher risks, as the company has not yet completed the public offering process, and information about it may be limited. There is also a possibility that the IPO may not occur or will be postponed.
   • IPO represents lower risks for investors due to the disclosure of complete information and strict regulation by financial authorities.

Example: Pre-IPO of Open Oil Market

Currently, my company, Open Oil Market, is conducting a Pre-IPO round to raise the funding needed for business expansion and preparation for public listing. We are creating a platform that connects suppliers and buyers of petroleum products on an industrial level, making the market more transparent and efficient.

The funds raised during the Pre-IPO will be directed towards platform development, marketing activities, and further optimization of business processes. The company’s valuation was carried out by the FINAM investment bank, which used a comparative method based on the indicators of OZON. This helps to establish a more accurate market valuation and increase investor confidence.

Conducting a Pre-IPO allows us to raise funds at an earlier stage and mitigate the risks associated with the preparation for an IPO, thus providing a more stable market entry. We are targeting institutional and private investors who are willing to participate in a project with high growth potential.

Advantages and Disadvantages of Participating in Pre-IPO

Advantages:

• The opportunity to purchase shares at a lower price. If the company successfully conducts an IPO, the value of the shares may significantly increase, yielding high returns.
• Access to promising startups and companies with high growth potential. Pre-IPO allows investors to become "early" shareholders of promising companies.

Disadvantages:

• High risk level. Investments in Pre-IPO come with uncertainty and a possibility of capital loss if the company fails to go public or faces financial difficulties.
• Lack of liquidity. Shares purchased during the Pre-IPO cannot be quickly sold as they are not traded on the public market.

Advantages and Disadvantages of Participating in IPO

Advantages:

• Increased liquidity. After the IPO, shares are traded on the exchange, allowing investors to sell them freely.
• Company transparency. The company is obliged to provide comprehensive information about its activities, allowing for better risk assessment and future prospects.

Disadvantages:

• High competition among investors. Shares may appreciate quickly in the first days of trading, which limits the opportunity to purchase at a favorable price.
• Potential volatility. In the initial days after the IPO, shares may exhibit high volatility, leading to short-term losses.

How to Choose: Pre-IPO or IPO?

Choosing between investments in Pre-IPO and IPO depends on your goals, the level of risk you are willing to accept, and your investment strategy.

• Pre-IPO is suitable for those who wish to access promising early-stage startups and are ready to take on higher risks. This option can provide high returns if the company successfully conducts an IPO.
• IPO is more suitable for investors seeking more transparent and liquid assets, as well as those who prefer lower risks. Participation in an IPO allows investors to access shares of well-known companies and capitalize on market opportunities.

Both Pre-IPO and IPO play essential roles in attracting capital for companies and offer investors various avenues for investment. The example of Open Oil Market illustrates how Pre-IPO helps companies prepare for a successful market entry. When making a decision between Pre-IPO and IPO, it is crucial to thoroughly analyze the company, assess risks, and understand which level of return and liquidity suits you. Investing in these stages requires careful consideration and a deep understanding of market conditions.