Buying shares before an IPO means investing while the company is still unlisted. The investment is often described as pre-IPO, but the term says nothing about how close the company actually is to a listing. The listing plans may be well advanced, at an early stage, or change as market conditions and the company's circumstances change.
A purchase before the listing can take place in several ways. Existing shares can be bought from a current owner, new shares can be subscribed for in a funding round, or shares can be subscribed for in the offering ahead of the IPO itself. The transactions differ in terms of who receives the capital, how the price is set and what information is available.
Buying unlisted shares gives you the opportunity to invest in a company before a possible stock exchange listing. At the same time, liquidity is often lower and access to public information more limited than after the share has started trading on a marketplace.
What does pre-IPO mean?
Pre-IPO is used for investments in companies that are not yet listed but may seek a listing further ahead. There is no uniform time limit. One company may have started concrete work towards a listing, while another has only communicated the stock exchange as a possible future option.
The investment is made before the share has continuous public trading. The price is therefore not determined by a continuous order flow on the stock exchange, but by the terms of the deal in question and the information that buyers and sellers have access to. Previous transactions and funding rounds can provide guidance, but do not necessarily reflect the share's current value.
A stated ambition to list is not a promise that the listing will happen. The company's finances, investor demand, market conditions and the requirements for reporting and corporate governance affect both the timetable and the ability to complete the process.
Three ways in before the listing
In secondary trading, the investor buys shares that have already been issued. The purchase price goes to the existing shareholder and does not provide the company with any new capital. The deal can be carried out long before a planned listing, but also when the company is in a more active pre-IPO phase.
A funding round works differently. The company then usually issues new shares to finance its operations, its expansion or its preparations for the next phase of development. An IPO takes place even later in the process and can include both newly issued shares and shares sold by existing owners.
- In secondary trading, existing shares are bought from a current owner.
- In a funding round, new shares are normally subscribed for and the capital goes to the company.
- In an IPO, shares are subscribed for or bought in the offering ahead of the start of trading.
The difference affects how the investment should be assessed. Capital from a new share issue strengthens the company's financing but at the same time increases the number of shares. A secondary purchase normally does not change the number of shares or the company's cash. Announced listing plans and possible listing candidates can be followed in our IPO calendar, but every timetable must be assessed on the basis of the company's latest communication.
How a purchase works
A secondary deal requires a buyer and a seller to agree on the share class, number of shares, price and other terms. The articles of association and any shareholders' agreements need to be checked before the transfer. Consent, pre-emption before transfer and post-transfer pre-emption clauses (samtyckes-, förköps- and hembudsförbehåll) can give the company or other shareholders the right to influence who may buy the shares.
Via our platform, investors can see available buy and sell orders and place an order in an unlisted company themselves. When the terms of a buy order and a sell order meet, the agreement, payment and delivery are handled according to the share class in question. The process from placing an order to registered ownership is part of how trading in unlisted shares works.
Euroclear-connected shares can normally be delivered to a custody account that can receive the share class. In other companies, the buyer is registered directly in the share register. Payment is therefore only one part of the deal. The transfer also needs to be documented and the new owner registered correctly.
How the price is assessed
An unlisted share normally lacks the continuous pricing that exists on the stock exchange. The valuation is instead supported by previous trades, current buy and sell orders, the latest funding round and the company's development since then. Revenue, profitability, cash flow and future capital requirements also affect what price the market is prepared to accept.
The share class can be as important as the price. Ordinary shares and preference shares can have different voting rights, dividend terms and rights to payment on a sale or winding-up of the company. The price from a previous funding round therefore needs to be compared with the terms of the shares being sold in the deal in question.
The price before the listing does not necessarily correspond to the offer price in a future IPO. New funding rounds, changed growth prospects and the market's risk appetite can raise or lower the valuation. An earlier purchase therefore does not automatically mean a lower entry price or an increase in value when trading begins.
Review the company before buying
The company's listing plans are only one part of the investment decision. The analysis also needs to cover the business, the finances and the financing needs. A company with fast-growing revenue can still be dependent on recurring funding rounds, which can dilute existing owners and extend the time until a possible listing.
The ownership structure and the terms of the share class need to be reviewed together with the company's financial development. Options, convertibles and resolved share issues can affect the number of shares going forward. The articles of association and the shareholders' agreement may at the same time contain terms that limit the ability to sell or affect the outcome of a future exit.
The following documents are particularly relevant before a purchase:
- The company's latest annual report and later financial updates.
- Revenue, costs, cash flow and expected capital requirements.
- Ownership structure, number of shares and outstanding options or convertibles.
- The share class's voting rights and economic rights.
- The articles of association and any transfer restrictions.
- The valuation and terms of previous funding rounds.
- How far the company has come in its work towards a stock exchange listing.
Available company data, price history and market activity support the assessment of an offered price. The ability to explore unlisted companies also makes it easier to compare companies from different sectors and stages of development before an investment decision is made.
Risks before the listing
A planned stock exchange listing can be postponed or cancelled. Weaker results, weaker demand or uncertain market conditions can lead the company to choose to wait. The holding then remains unlisted and may need to be kept considerably longer than the investor first expected.
Liquidity is normally lower than on the stock exchange. The number of buyers and sellers may be limited, and periods without completed trades make pricing more uncertain. A positive development in the company does not mean that the shares can be sold at the desired time or at the valuation the owner expects.
The risk assessment needs to cover several aspects:
- The listing may be postponed or cancelled.
- The shares may be difficult to sell before the listing.
- The company's valuation may fall before trading starts.
- New share issues may dilute the existing ownership stake.
- Different share classes may give different rights on an exit.
- Transfer terms may limit the ability to sell.
- Company information may be limited or out of date.
An upcoming IPO does not remove the underlying risks. The investment needs to be justifiable on the basis of the company's business, finances and valuation even if the listing is delayed or does not take place.
When the company is listed
Ahead of an IPO, the company adapts its reporting, governance and organisation to the requirements of the marketplace in question. An offer to the public or an admission to trading on a regulated market normally requires a published prospectus, unless an exemption applies. The documentation must give investors information about the company, the offering and the main risks.
The listing can create clearer pricing and better conditions for trading, but existing shares do not always become saleable from the first day of trading. Lock-up agreements, technical registration and terms linked to the share class can limit the ability to sell for a certain period.
The market price can turn out both higher and lower than the price in the unlisted market or the subscription price in the offering. Supply, demand, results and market expectations start to affect the price continuously when trading opens. The difference between the offering, the listing and the subsequent trading becomes clearer in our explanation of what an IPO means.
Questions about an available share class, an ongoing order or the delivery of an unlisted holding can be raised directly with us. Contact Eqvor before placing an order if the terms or the practical handling need to be clarified.
Disclaimer: The content of this article is provided for information purposes only and does not constitute tax advice, legal advice or an individual recommendation. Tax outcomes are affected by applicable law and the specific circumstances of each individual case. Eqvor strives to ensure that the information is correct and up to date, but gives no express or implied guarantees as to the accuracy, completeness or timeliness of the content. To the extent permitted by applicable law, Eqvor disclaims liability for damage or loss arising from the use of the article or reliance on its content. Anyone considering acting on the information should obtain independent advice from the Swedish Tax Agency (Skatteverket) or another qualified adviser.
