An offering of shares in a company before its initial public offering (IPO). Pre-IPO offerings are available only to a limited number of individuals, and are done in advance of an expected IPO. Pre-IPO prices are generally much lower than they would be at the IPO, but are risky for the investor, as their value is contingent upon the company eventually making an IPO. This is because pre-IPO shares attract little demand in situations in which there is insufficient demand for an IPO soon after; they usually become illiquid securities.
An offering of a company's shares prior to the firm's initial public offering. Investing in a pre-IPO tends to be very risky, in part because the planned IPO may never take place. In addition, shares from a pre-IPO are unregistered and are likely to be very difficult to sell until the public offering is completed.
Case Study Acting Securities and Exchange Commission chairman Laura Unger told a congressional subcommittee in July 2001 that 16 of 57 analysts reviewed by SEC staffers had invested in 39 pre-IPOs of companies they subsequently covered. In most cases shares offered in pre-IPOs are priced substantially lower than the subscription price in the subsequent IPO, meaning that many analysts who participated were able to acquire shares at very low prices. The conflict of interest is clear: analysts are likely to have a personal interest in promoting stocks they own, thus tainting the independence of their recommendations. Corporations are anxious to have analysts come on board as shareholders, in part because of the creditability analyst ownership conveys to the investing public. Analyst ownership may also result in positive investment recommendations that become a marketing campaign for the firm's stock.