Why invest in pre-IPO companies?
For the past decade, the IPO market has gone through a large growth phase, with a total volume of money raised going from $142.3B in 2012 up to $421.4B (YTD 2021) and a total number of IPO deals rising almost 300%. With more and more companies going public each year, IPO markets are setting new records all around the world, from the U.S. and Brazil to China.
Traditionally, IPO presents a great opportunity for a company to set its foot in the global arena and raise its valuation by offering shares to private investors. Going public is a vital signal for traders to watch this company and buy its stock on the day of listing.
Investments in IPOs have a different risk assessment, depending on the investor's time horizon and exit strategy. While newly public companies can be categorized as high risk and volatile for a long-term investment, most of the IPOs tend to flourish at least short-term, providing positive returns for early investors right on the listing day. Even if such a company fails in a long-term perspective, hype raised before the IPO process positively affects its evaluation and listing prices.
The current situation in the pre-IPO investment market is hardly positive for individual investors. Despite the growing popularity and prospects of the IPO market, there's seldom an opportunity for individual investors to get their hands on the company's shares before listing on an exchange. Such offerings are usually limited in availability and reserved for eligible investors. Institutional investors and fund managers tend to be primary buyers for pre-IPO offerings, as they usually have the means and permissions to purchase multiple packages of shares.
However, the emergence of blockchain has given us an opportunity to recreate pre-IPO investments in a more accessible way, with convenience and transparency in mind. We leverage technology to merge traditional finance with crypto and empower individual investors with access and opportunities similar to institutional market players.
Together with Ambisafe, we've developed a permissionless and transparent way of pre-IPO investments, which is implemented in NeoBroker Smart Fund. Smart contract technology provides us with the ability to create exact on-chain representations of various real-world assets, including stocks. Such on-chain representations are called tokenized securities, they are issued using BEP20 token standard, with price tied to the value of an underlying asset.
This approach provides a significant advantage over traditional shares for individual investors. While it is impossible to purchase less than 1 share at the exchange (and with pre-IPO companies, shares are usually sold in packages of 100-1000 pcs.), tokenized securities are frangible specifically to lower the entry threshold so that you can easily purchase only a half of a share in form of a token.
Despite being pegged to shares in value, tokenized securities cannot be considered shares from a legal standpoint due to the unclear regulatory environment around cryptocurrencies. Respectively, they do not give purchasers any ownership or voting rights in the company, besides the right to receive proceeds from the disposition of such assets.
In order to provide tokenized securities as a service, we utilize a middlemen organization — Unicorn Tokenization Corp., — an investment fund that fully owns and manages actual shares, including initial purchase, evaluation, disposition on the IPO date, and distribution of proceeds from disposition to token holders. The fund also serves as an off-chain oracle, providing relevant information about the offering: token price, active offering dates, total fund volume, IPO dates.
The fund is established specifically to invest in private companies during their pre-IPO phase and achieve positive returns post-IPO, after disposal of such investment on the listing date.