Some market participants are often looking to buy shares in private corporations in hopes of ‘getting in early’ on a good company. For retail investors, investing in private companies that don’t trade on stock exchanges can be quite hard but not impossible. There are a few outlets that allow investors to invest in private securities but it won’t be easy to get an “accredited investor” designation; this is often a precursor for investing in private companies.
What to Expect
With that being said, one question still looms, “do you really want to invest in a private company?” If so, here’s some of what you can expect when buying / holding shares that aren’t publicly traded.
- Illiquidity and Lack of Valuation – Without a liquid market, like with publicly listed companies, investors have a hard time knowing what their shares are worth after the initial purchase. This also means that you will not be able to buy or sell your shares at your leisure, you might have to wait weeks, months, or years to find a buyer.
- Lack of Information – Assessing a private placement is incredibly difficult. You’re not going to get access to as much information as you would with a publicly listed company and the company may not even have a track record. Earnings, customer base, and financials might be a little more suspect than those of regulated companies on a stock exchange.
- High Dollar Figure Investment – Buying private securities usually requires a higher investment figure than publicly traded shares. Private share lots can run anywhere from 5-figure to 8-figure sums or more depending on the funding round. To go further, there are no fractional share opportunities or small entry lots for privately held shares.
If none of that information deters you, by all means do your due diligence and start looking at private companies that you might like to invest in. There’s a few companies that have popped up over the last decade that specialize in ‘pre-IPO investment platforms’. They allow you to buy and sell private securities when certain opportunities arise (essentially a market for private securities among accredited investors).
Pre-IPO Investment Platform
The Accredited Investor Designation
This designation is required to purchase securities that aren’t registered with the Securities and Exchange Commission (SEC). This is because of the heightened risks involved with purchasing shares in private companies who have little oversight. It’s a high risk / high reward market and because of that, it’s reserved for ‘accredited investors’.
There are 2 ways to achieve this designation:
- A natural person with income exceeding $200,000 in each of two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
- A natural person who has an individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person.
Once a market participant has achieved that, the world is their oyster; and it’s as simple as that to purchase shares of private companies that don’t trade on stock exchanges.