How The Pre-IPO Market Is Rigged Against The Retail Investor

Pre-public assets, where the largest returns reside, have historically sat firmly out of reach for retail investors, but decentralized finance (DeFi) applications and protocols like prePO are democratizing access to private equity and pre-token projects.

United States - August 14, 2021 —

It’s no secret that the private or ‘pre-IPO’ market is rigged against the retail investor.

If you thought it was difficult to secure an allotment or allocation in an IPO, just imagine how hard it is to participate in an equity raise for a private company before it goes public.

The simple truth is that access to private markets has always been reserved for an exclusive and elite club of participants, with venture capitalists, family offices, private equity funds, and high-net-worth individuals all jostling for limited allocations.

As an ‘unsophisticated’ retail investor, this means your chances are pretty slim.

It also means you are precluded from access to a market where some of the largest returns can be made, with growth rates sometimes in orders of magnitude higher than what can be found in public markets.

Outsized returns

Perhaps the best way to demonstrate some of the astonishing returns that private markets can offer is to compare the relative value generated pre-IPO versus post-IPO. Google, Facebook, Twitter, and Spotify - to name but a few examples - all had private market multiples which eclipsed their public market multiples by many magnitudes.

Take Twitter for example. The stock was offered at $26 per share in the IPO; today, it commands a price of $67 - almost a 2.6x in the span of 8 years. However, this pales in comparison to the 64,545x return over the 6.5 years from Series A to IPO for Twitter’s private investors.

To put this in perspective: if Twitter had the same growth trajectory in the public market as in its private market, each share would be worth a staggering $1,670,000 today. These are the opportunities that regular retail investors are completely excluded from.

High barriers to entry

Unfortunately, in order to access these outsized returns in the private market, you generally need to be considered a ‘sophisticated’ or accredited investor.

In the United States for example, individuals in most instances must have a net worth of over US$1 million (excluding their primary residence), or an annual income exceeding US$200,000 over the past two years, to qualify for private investment opportunities.

While the U.S Securities and Exchange Commission (SEC) recently amended its definition of an accredited investor, allowing for measures of professional knowledge and qualifications to be considered alongside pre-existing income and asset tests, for the vast majority, these changes are irrelevant considering the median annual income is just over US$65,000.

While limitations and basic requirements can vary, for some transactions a minimum investment of anywhere between US$100,000-500,000 is required - and in other cases, it is in the millions.

If that doesn’t sound bad enough - wait, there’s more.

You’ll be further disheartened to know that should you pass the various asset, income and knowledge test requirements to become an accredited investor, your options for where and what you can invest in will still be limited.

Direct investment into a private company is pretty much off the table and is usually only reserved for institutional investors. Therefore, as an individual, your most likely means of accessing these opportunities is through a venture capital or private equity fund where you will own units in the fund but not the underlying investment in a private company.

So as an individual investor, you don’t really get much of a say.

Lock-up periods

In the unlikely event that you are able to secure an allocation in a private funding round, most private companies demand a lock-up period that can extend anywhere between 12-24 months after IPO - adding another layer of complexity and red-tape for retail investors.

This means retail investors looking to ‘flip’ their shares upon listing are unable to do so, and while some unofficial ‘gray market’ trading venues do exist, their reliability and accessibility is often limited.

Democratization of private markets

Pre-public assets have historically sat firmly out of reach for retail investors, but with the rapid emergence of decentralized finance (DeFi) applications, this is all beginning to change.

prePO - which recently closed its $1.1M USD seed round - is one such application, enabling anyone anywhere to speculate on the valuation of private companies like SpaceX, Bytedance, Epic Games, Klarna, Byju’s and more.

Additionally, prePO also provides investors with access to private cryptocurrency markets, enabling speculation on crypto projects before they launch a public token. If the ICO boom of 2017 is anything to go by - where investors achieved an average return of 12.8x on their initial investment - these pre-launch token markets could be even more lucrative than pre-IPO speculation.

And unlike the investors in venture capital funds, who don’t get a say in how the funds are allocated, holders of the prePO governance token ($PPO) will be able to directly influence the future of the project, such as voting on which new markets should be created.

In the future, it is clear that the only limitation retail investors will face when it comes to investing in private markets is their own imagination.

prePO will be launching its token and beta program later this year on the Ethereum blockchain.

ENDS
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Contact Info:
Name: Sarthak Khurana
Email: Send Email
Organization: prePO
Website: https://prepo.io/

Release ID: 89041537