Pre-IPO and Equity Crowdfunding
The abbreviation IPO stands for Initial Public Offering and represents the first presentation of a company's shares on the stock exchange. From this moment on, your company acquires public status, and anyone can become its shareholder simply by purchasing shares.
PRE-IPO is the opportunity to invest funds in a new company before it goes public. The PRE-IPO occurs by selling shares to private investors, bypassing the exchanges prior to the planned IPO.
Typically, in such cases, private investors and funds act as investors. They are ready to acquire large packages of securities. At the same time, investors are also in a favorable position—the share price during the PRE-IPO is lower than the price planned for the market debut.
Why Conduct a PRE-IPO
Raising funds before an IPO allows your company to gather some capital for development even before the shares hit the market. The thing is, an IPO does not guarantee that the company will raise the required amount of money or that shares will find buyers at the starting price, nor is there any certainty that the share prices will remain at the initial level or start to rise. They may fall to levels below the starting price. Even shares of giants like Facebook fell below their starting price at the beginning of their IPO. Thus, this measure helps mitigate the risk associated with low demand for shares and the potential decrease in their value. Additionally, a PRE-IPO is an excellent opportunity to find out whether there will be any demand for your company's shares. If it turns out that the expected demand is lacking, it is better to postpone the presentation of securities on the stock exchange until a more favorable time and improvement in the company's financial performance.
If there is demand for shares during the PRE-IPO and it leads to a rise in prices after the IPO, both you and the early investors who invested in the Pre-IPO stage will benefit. For them, this is a good investment, which they can later recoup with solid returns by reselling the shares. In some cases, it is advantageous to sell shares before the IPO with a lock-up period. This way, it will be easier for you to attract long-term investors, excluding short-term trading of your shares.
Example of a PRE-IPO
Alibaba is a company whose PRE-IPO example is more than successful. The company's shares were presented on the stock exchange in September 2014. Before that, they were offered to private investors during the Pre-IPO. In June 2014, the company was valued at $150 billion. This led to increased demand for the IPO, and even before it, investors eagerly purchased Alibaba shares.
One of the largest investors was Asian investor Ozi Amanat, who distributed the purchased shares among several families associated with his fund. Each of them held shares valued at up to $60 each. Demand for Alibaba shares at the IPO was higher than expected, and the company went public. As a result, their yield exceeded 48%.
Thanks to these events, Alibaba gained a double benefit. Before the IPO, it secured the necessary funding, and afterwards attracted even more investments than expected. As for Ozi Amanat and his friends, it can be confidently assumed that their wealth significantly improved.
What is Equity Crowdfunding and Crowdinvesting
Equity Crowdfunding and crowdinvesting are two effective methods for attracting investment to small businesses and startups. Their effectiveness is high, thanks to the ability to work with a wide range of investors. This tool is particularly popular in the United States. In 2018, the investment crowdfunding market reached nearly seven billion dollars, with 70% of the deals concluded in the U.S.
Do not confuse general crowdfunding with equity crowdfunding. In the case of crowdfunding, backers (not investors) simply provide money for product development without receiving a share in the company. Equity crowdfunding is when small investors at early stages can buy shares in a company, thus obtaining an ownership stake.
Crowdinvesting and equity crowdfunding differ from each other. Crowdinvesting is an alternative method of raising funding for enterprises without a credit history and a business plan that could be presented to banks. Private investors receive a share of the capital. They are informed of the risks associated with the potential loss of their investments. The profit size in the case of the company's success is unknown.
Equity crowdfunding is a tool that is most effective when small investments are needed. It is ideal for small businesses and startups that are not attractive to business angels and venture funds investing in IT technologies.
For technology startups, equity crowdfunding is an excellent opportunity to reach a new level of development. The amount of investment for them is approximately $500,000 to $1 million. This is enough, for example, to begin mass production of a working prototype.
Communication with investors most often occurs on specialized online platforms. Their operational features vary depending on the country and its legislation. Some of them offer preliminary assessments of potential project value and its market prospects, while others simply allow interested parties to meet and negotiate. Sometimes, companies also find business angels and professional investors through such platforms.
Despite all the advantages of crowdinvesting, there is a legislative limitation hindering the expansion of its market. The fact is that only accredited investors can invest through crowdinvesting platforms.
Equity Crowdfunding Platforms in the U.S.
The largest equity crowdfunding platforms in the world (by turnover and number of investors) are located in the U.S.
If you need an American investor, check out these resources:
- EquityNet. This platform is one of the first of its kind to appear in the USA, founded back in 2005. Nine years later, in 2014, the amount raised for American startups and small businesses amounted to $240 million, with 45,000 investors working on the platform.
- AngelList. This site has been operating since 2010. It offers investors the opportunity to create syndicates for large joint investments. Therefore, it is a good place to seek investors not only for small startups but also for quite substantial ones.
- SeedInvest and FundersClub. These resources are roughly equal in popularity. They specialize in specific sectors, and investors on these platforms also choose to invest only in companies from particular areas of business.
- CircleUp. Investments in small and medium-sized businesses with real products and employees.
- Wefunder. A relatively young platform with an interesting story. At one point, this project received investments for its development through its own platform. So, it's definitely worth trusting its specialists. The resource specializes in startups.
- StartEngine. A project that has garnered significant interest from investors. Proof of this is the pre-reservation of shares. There is a notification system for the start of investment for those who reserved securities of specific companies.
- SmallKnot.com. This platform specializes in investing in businesses within the investor's region.
We have listed the most popular equity crowdfunding platforms in the USA here, but the list is constantly being supplemented with new ones. It’s worth noting that working with new resources can be more challenging due to the limited number of accredited investors on them. Some of them may not even have experience investing on a specific platform, as they learned about it only recently. Therefore, to attract funding on new platforms, you need to first acquire tools for effective promotion.
Equity crowdfunding in the USA could have developed much more. It was hindered by restrictions imposed by the SEC – the Securities and Exchange Commission. The law regulating it was introduced back in 1933 during the Great Depression, aiming to protect private investors from risky and unpromising investments. Only citizens with an income of $200,000 a year or a capital of $1 million in a bank account were allowed to invest. Nowadays, nothing has changed, but today there are more than 7 million accredited investors in the USA.
Former US President Barack Obama signed a new law in 2012 called the JOBS Act, concerning startup financing. Its goal was to attract investments in small businesses and provide greater freedom to the crowdfunding and equity crowdfunding market. Proponents of the law, including many public organizations in the USA, believed it would help reduce the pace of economic decline. According to the law, financial portals must be registered with the SEC and become participants in a special self-regulatory organization.
In September 2013, Section 2 of this law came into effect. Since then, advertising for crowdfunding has been allowed, but only accredited citizens still have the right to invest. By 2014, the crowdfunding market had risen to $250 million.
Only in 2016 did equity crowdfunding become available to everyone. Today, non-professional investors can invest up to 10% of their annual income in startups. The amount that a company can raise this way has significantly increased and now reaches $50 million. Due to these changes, a significant increase in the number of investors is expected.
Is there crowdfunding in Kazakhstan?
Yes, such resources are now available in Kazakhstan and other developed countries. The first crowdfunding platform was launched in Russia back in 2012, called Smartmarket.net. Less than a year later, it shut down. Then there were VCStartWeShare, which also closed down. Currently, StartTrack and Venture Club are still operating. The StartTrack platform was opened in 2018, and it is still too early to speak of its successes or failures. However, crowdfunding in Kazakhstan does not enjoy the same popularity as in the West, and its financial indicators are hundreds of times lower than those in the USA. The specific features of Kazakhstan's legislation and the structure of most companies, which have a limited number of owners, hinder the development of this type of investment. This necessitates attracting large investments from one or two individuals. Moreover, all owners must be physically present at certain stages of the agreement process. For example, this is required for the transfer of shares in the authorized capital to a new investor. Therefore, this type of investment is not and is unlikely to become a mass phenomenon in Kazakhstan. In Ukraine, Belarus, Kazakhstan, and other countries, this method of attracting investments is currently impossible due to the complete absence of legislation on this issue.
How can we help you?
If you've decided it's time to attract investments for your business project, and if you are working or planning to relocate your company to the USA, we can help you. Our specialists will choose the optimal online platform for you, prepare a presentation from scratch, and present it to potential investors. All you need to do is bring your plans to life and achieve the expected profit.
