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22 Dec How to Get Stock in an IPO

Before we discuss some methods on getting in early in a company that is intent on going public, it will be wise to first do a quick ditty on the various methods of going public. Once you have a broad understanding of the various methods, you should then have a better idea as to where you fit on the value chain of finding opportunities to get in on pre-IPO investments. Be aware, scams for these types of pre-IPO opportunities abound and you’re certainly unlikely to find high-profile opportunities with big names like Facebook unless your last name is Sachs and your first name is Goldman. That doesn’t mean that there aren’t great opportunities to experience great gains on acquiring low-basis stock in companies that are on the precipice of taking the public market leap.

I’ll be brief on some of the methods, as we’ve discussed them before at some length. A quick review is certainly helpful.

  •  Traditional IPO. This includes the whole entourage, including underwriting, road shows a beauty pageant, etc. This is of course the most expensive and often most time-intensive route.
  • Reverse Mergers. The types of reverse mergers are vast.  A reverse merger can be done through defunct companies who’ve been cleaned for the purposes of a reverse merger or through manufactured vehicles like a SPAC or something similar. Reverse mergers with manufactured SPACs (Special Purpose Acquisition Companies) financed by PIPEs (Private Investments in Public Equity) are often referred to as Alternative Public Offerings or APOs.
  • Direct Public Offering (DPO). It’s cheaper, faster, but doesn’t typically raise as much capital as a traditional IPO. It simply involves direct share registration and doesn’t require a specific amount of capital is raised. An investment bank is helpful, but not necessarily needed unless the company is really looking to raise some money. Because a DPO removes the middle-man in selling securities a company can, once the shares are registered, sell stock to any retail investor. Here’s a good summary.

There are other nuanced sub-methods of the above and ways to raise capital with each, but I’ll forbear as it doesn’t relate to finding investment opportunities. So, how does one get in early? Here are a few options, some feasible, some out of the question–mostly depending on your personal situation. You determine what might fit your needs and investment strategy.

Know someone. In the market of pre-IPO shares, it’s often about who you know.

Have deep pockets. Private-to-public transactions are typically (at least in the traditional IPO sense) well funded by sources in private equity and/or venture capital.

If the two options above aren’t causing the alarm bells to go off, then you’re likely among the 99.9% of individuals and institutions shut out from many of the best private-to-public deals.

Troll the News. You can follow Google News, Twitter or StockTwits. Typically there are both short and long opportunities that abound, but you’ll also likely get wind of legit reverse mergers or DPOs that may be coming down. Large amounts of risk are associated with making assumptions in this vein. There is always wind of the latest “potential” investment from one firm to another, but nothing is ever sure and there’s no way of truly knowing if some whispering on Twitter will ever actually materialize.

Get Involved with Reverse Mergers. The best way for smaller investors to have opportunities in the public offerings of companies is to know someone deeply involved in taking mid and micro-cap companies public, typically on the OTCBB or OTCQB. The earlier one can get involved, the better. That includes helping out as a shareholder in manufactured vehicles, including SPACs and other cleanly created shells for the purposes of finding a good reverse merger candidate. There are multiple areas to insert yourself into the process, but most involve investing in financial vehicles before they either get up and trading or have a target for reverse merger. In most cases, it doesn’t take accredited investors due to the fact that consideration given for the stock

Start a Company and Take it Public. The methods listed above aren’t just for investors, but for bold entrepreneurs willing to take risks. Perhaps the best way to get in early is to start a business, grow it (and preferably get it profitable) and then take it public. There are a couple more benefits to this strategy, the biggest being that taking your own company public means you can own a greater share of the company’s stock. If a good pop occurs, you reap much more benefit than the smaller equity position most smaller, non-founding  investors might receive.

The benefits of getting in early on a stock that is about to “pop” as they say are numerous. One of the biggest boons is the ability to ride the wave of public value accretion. When stocks of strong companies go public, regardless of the process, there is of quick and hopefully long-term capital appreciation that takes place. Some may claim the title of this post is misleading and that I’m advocating getting in early on something other than a traditional IPO. For most small-time investors, it’s their only option. In addition, it’s likely an argument in semantics on what defines an Initial Public Offering. Regardless of what you call it, opportunities are always available to reap the rewards that come when private companies go public.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
  • Tony Montgomery

    Great information..