Many private companies decide to go public without much notice or fanfare. In part, the radio silence can be attributed to the SEC’s requirements for official notice filings. Going public is often big news, which means the company will be scrutinized more closely. When a company can work in peace and secrecy, it is much easier to plan. However, there are several indicators that a company is about to leap before the official announcement and filing.
Enhancements to Corporate Governance
According to the Sarbanes-Oxley Act of 2002 (SOX), public companies listed on U.S. stock exchanges are required to uphold specific standards of corporate governance. Internal controls over the company’s financial management should have an external board of directors, as should a formal process for employees and others to directly access the audit committee to report any illegal or policy-violating activities. A sudden flurry of new policies and procedures may signify that the company is getting ready for an upcoming IPO.
It’s time for “Big Bath” Reviews!
Investors and analysts scrutinize publicly traded companies’ annual and quarterly financial statements and those preparing to go public. Businesses contemplating an IPO frequently examine their financial statements and take any write-offs allowed by generally accepted accounting principles (GAAP) all at once to present better income statements in the subsequent period.
As an example, accounting rules mandate that companies write down inventory that is unsellable or is worth less than its original cost. But there is a lot of latitude in making that choice. Banks and lenders often require companies to keep inventory on their balance sheets to meet asset ratios. Stockholder profitability can suffer if inventory is not written off sooner rather than later when a company is contemplating going public.
Managerial Shifts that Come Quickly
A company needs to consider how well-qualified its current management is and if it needs some spring cleaning before going public. Investing in a public firm requires that its executives and managers have a proven track record of bringing their previous enterprises to a profit. If a firm undergoes a major reorganization at the highest levels, it may indicate that the company is working to improve its public image before going public.
Getting rid of non-core business lines
When a company is formed from the ground up, it is common to have several ancillary business units attached to it. An example is a company that sells office supplies and provides payroll services. No direct link exists between the secondary business and the main business. The prospectus is expected to highlight a firm’s business direction to advertise the company in an IPO. Perhaps the corporation is being lean and means in preparation for an IPO by cutting back on non-core operations.
What does it mean to invest in a company before its initial public offering (IPO)?
For small enterprises just starting out or just after they’ve reached the heights of their growth potential, pre-IPO investing, also known as “angel investing” or “startup investing,” gives seed money or operations cash to help them thrive. The risk of pre-IPO investing is high, but the rewards might be substantially greater than those of investing in a well-established company.
Is It Legal to Trade Pre-IPO Stocks?
Through your broker or online trading app, yes. Usually, they require you to hold onto them for an entire year. However, once a firm becomes public, the most significant return on investment is generally obtained. If you buy after the IPO, keep in mind that insiders, such as the company’s owners, managers, workers, and early investors, cannot sell their shares for 90-180 days.
Are Pre-IPO Companies Worth Investing In?
Small investors can now examine pre-IPO investment opportunities using one of the low-cost online platforms. Investing in pre-IPO companies can be risky, so don’t put more money at risk than you can afford to lose when you start.
The Advantages of Investing in Pre-IPO Stocks
Before a firm’s initial public offering (IPO), you can purchase pre-IPO shares after you open a demat account. This means you are investing in the company at a point in its development where it is experiencing growth and generating revenue.
The company may offer you and other employees the opportunity to participate in the company if the company is growing and considering a public offering once it reaches a specific size. Employees are the best people to ask about a company’s future viability. However, before investing, do your research and look over your employer’s financial reports.
Due to private companies’ capacity to keep quiet until the SEC-required filings and announcements, it can be challenging to determine whether a company is headed toward going public. However, there are always more subtle clues for those looking for them.