The stock market has been the primary destination for cutting-edge businesses in developed economies to get funding for the longest time. Historically, companies tried to go public as soon as possible - raising capital and attracting investors from all over the world. However, this trend has been changing rapidly.
Nowadays, companies stay private for longer, choosing to raise capital through closed funding rounds and venture capital firms before going through the complicated process of listing shares on a major exchange. For this reason, the demand from private investors to gain access to pre-IPO equity has grown substantially over the past decade.
The market was quick to meet demand, with many private equity marketplaces offering pre-IPO stocks in private companies for sale to accredited and non-accredited investors alike.
Private equity investments come in many forms - investors may choose between crowdfunding platforms that offer easy exit strategies, or curated marketplaces for buying and selling private shares. Either way, private equity investments carry a lot of risk and for this reason, they are often available for accredited investors with sufficient net worth.
With the democratization of finance, many platforms offer deals to everyday investors as well, which has transformed the industry in a much more inclusive way.
How Do Private Equity Investments Work?
Private equity investments are a subset of alternative asset classes due to the relatively low liquidity and high degree of risk involved.
Typically, companies that seek capital through private channels are startups with little past experience, which heightens the risk of default for investors. For this reason, most investors tend to shy away from private markets and stick with traditional liquid public companies.
Private equity investments that take the form of crowdfunding rely on a large number of backers that pledge a certain amount of capital that may start from as low as $50. However, most crowdfunding platforms allow member companies to set a minimum threshold for investors.
The platform obliges companies to provide as much information regarding the business as possible, which includes the list of all relevant directors and top managers, the reason for the funding round, and future goals that will be achieved using the investment.
Investors can hold their positions for years and eventually cash out of their positions once the company has reached a sufficient scale where it can pay the investors to buy back its own shares from them at a higher price - netting the investors a profit.
However, it is important to consider that most startups fail and investors have no guarantees of ever receiving returns from their investments.
Types Of Equity Crowdfunding
Equity crowdfunding is a popular method for thousands of investors to raise capital for a prospective company to use and expand its operations and eventually net returns for the investors. Typically, most startups go through a series of crowdfunding events, which can be broken down into categories based on the size of the company and the stage of its business:
Regulation Crowdfunding (Reg CF) - Reg CF allows companies to raise capital from both accredited and non-accredited investors. There are limitations on the amount a company can raise in a 12-month period, and individual investment amounts are also capped based on the investor's income or net worth
Regulation A+ (Reg A+) - Reg A+ allows companies to raise larger amounts of capital, up to $50 million in a 12-month period, from both accredited and non-accredited investors. The offering is subject to more extensive disclosure requirements and must be qualified by the SEC
Regulation D (Reg D) - Reg D allows companies to conduct private placements and solicit investments from accredited investors only. This model is not subject to the same disclosure and reporting requirements as the previous two models
Investors can verify any prior funding rounds conducted by the company before investing. Crowdfunding platforms also provide this information in conjunction with the latest valuation figures and total amounts raised in each funding round.
Accredited VS Non-accredited Investors
A key factor in understanding private equity investments is in determining who has access to these deals. Many platforms limit their customer base to accredited investors, which comes with a net worth and income threshold. Regulators assume that investors with a sufficient amount of capital are more likely to invest responsibly and not jeopardize their financial well-being.
By definition, an accredited investor is someone who:
Has a net worth exceeding $1 million (excluding their primary residence)
Has had an annual personal income exceeding $200,000 over the past two years
Has had a joint annual income with a spouse exceeding $300,000 over the past two years
Investors that satisfy any of these three criteria are considered to be accredited investors and will have access to most private equity deals.
On the contrary, non-accredited investors are everyone who does not meet any of these criteria and may face some restrictions regarding what they can invest in.
It must be noted that even accredited investors will have constraints as to how much of their capital they can invest - the higher their net worth, the higher their investment ceiling.
Best Pre-IPO And Equity Crowdfunding Platforms
There are a variety of platforms that offer equity crowdfunding rounds and pre-IPO share trading to investors, which helps boost private market transparency and early engagement with the investor base.
Forge Global
Forge Global is a private equity platform that allows investors to buy and sell shares in pre-IPO companies. The platform includes the likes of SpaceX, OpenAI, Helion Energy, etc.
Forge Global has overseen a number of IPO exits from its platform, such as Samsara, Rivian, HashiCorp, Sweetgreen, etc.
Forge Global is also a publicly listed company itself - trading its shares on the New York Stock Exchange, under the FRGE ticker.
The platform is primarily accessible to accredited investors and includes some of the hottest deals on the market. Individual and institutional investors alike can access the platform, which increases liquidity on the secondary market.
Forge Global also administers its own private market index, which has returned above comparable public market indices.
Existing shareholders of listed companies can sell their shares to accredited investors, which also improves liquidity for old shareholders of the company, such as co-founders looking to exit the company and move on to other ventures.
As of May 2023, there have been over 500 companies present on Forge Global, with $12 billion in trading volume
EquityZen
EquityZen is another platform for pre-IPO share investing that helps boost liquidity in the private equity markets.
EquityZen allows accredited investors to gain access to private stocks. The platform offers over 400 companies to its investor base, which consists of over 300,000 users worldwide.
The process of investing on the EquityZen platform can be broken down into the following steps:
Sign up and verification of accredited status to gain access to private offerings
Browse companies and reserve investments in EquityZen’s fund offerings. Investors can indicate their interest in upcoming offerings to be notified when they become available
Execution of investment documents and investment funding via ACH or wire transfer
Track and manage investments and documents. EquityZen will send updates on any changes occurring in their investment
If the company goes through an IPO or gets acquired by a third party, EquityZen will distribute shares or cash proceeds to investors. However, IPOs and acquisitions are not guaranteed
EquityZen allows investors to access a $1.8 trillion private equity market, which has been growing rapidly over the past few years. EquityZen’s funds have closed over 37,000 investments since launch.
Dizraptor
Dizraptor offers investors access to pre-IPO deals in hundreds of companies. The minimum investment amount is $1,000, which makes deals accessible to a broader base of investors.
The funds are created using investors’ capital to create SPVs to acquire stakes in offered companies.
The general process for investors can be broken down into simple steps:
Dizraptor chooses in-demand companies for its market offerings
Detailed investment offerings are posted on the app for investors to review
Users make their offers and sign papers via the app
When and if the company goes public or gets acquired, investors receive their returns
Dizraptor greatly simplifies the process of investing in pre-IPO equity by cutting out the hassle of researching each deal individually by offering detailed profiles for each investment on the platform that investors can review and seamlessly make an offer via the Dizraptor app.
AngelList
One of the most popular private equity investment platforms, AngelList connects angel investors and start-ups to raise funding.
AngelList has a broad lineup of offerings that range from early-stage start-ups to large private companies. AngelList allows startups to create profiles and showcase their business ideas, products, and traction.
Startups can also indicate their fundraising status and the amount they are seeking to raise. This information is made available to a network of accredited investors who can browse and invest in the startups they find promising.
AngelList also offers the formation of investor syndicates, where lead investors can pool their capital and expertise to invest in startups. This allows smaller investors to participate in deals alongside experienced lead investors.
Investors can choose to pick deals individually or invest in AngelList funds that are diversified across multiple offerings. Start-ups can also create and manage rolling and venture funds to manage when to accept funding from angels. Investors can also subscribe to these rolling funds to make investments each quarter, which creates a fixed chain of demand between investors and start-ups.
Republic
Republic is a private equity investment platform that offers investors a broad range of investment options, including, but not limited to:
Start-ups - Investors can browse through a curated selection of startups and invest in companies they find promising. These investments are often made through Regulation Crowdfunding (Reg CF) campaigns, which allow non-accredited investors to invest in private companies
Real estate - individual real estate projects, as well as diversified real estate funds
Crypto projects - Republic offers cryptocurrency projects open for investment, as well as NFTs and crypto wallets
Note investments - Republic.com offers investment opportunities in revenue-sharing notes, which are debt instruments that entitle investors to a share of the company's revenue over a specified period
Video games - Republic owns Fig.co, which is a video-game crowdfunding platform where investors can participate in revenue-sharing deals for video game projects
Republic offers a diverse lineup to investors, which includes a curated lineup of deals for accredited investors, which are locked from other users.
StartEngine
StartEngine is another equity crowdfunding platform that has quickly gained popularity among investors. The platform allows both accredited and unaccredited investors to participate in Reg CF offerings in startups from a wide variety of industries.
StartEngine also offers its own secondary market where investors can buy and sell their investments and while the marketplace may not be as liquid as public markets, the rising popularity of the platform has greatly boosted its liquidity.
StartEngine also offers a 10% share bonus to investors who refer others to the platform. Investors can also invest in StartEngine via its own platform, which was founded by former Shark Tank investor Kevin O’Leary.
StartEngine provides investors with a dashboard where they can track their investments, receive updates from the companies they've invested in, and access relevant documents. The platform also facilitates communication between investors and the companies, allowing for Q&A sessions, updates on business progress, and potential shareholder engagement.
OurCrowd
OurCrowd is another equity crowdfunding platform that allows investors to invest in startups, early-stage companies, and other private ventures. It enables accredited investors to participate in these investments and build a diversified portfolio of high-potential companies.
Investors get a curated lineup of investment opportunities from a wide range of sectors, including healthcare, technology, agriculture, and more.
OurCrowd primarily caters to accredited investors, who must qualify as such before accessing offerings on the platform.
OurCrowd operates on a syndicate model. This means that OurCrowd itself invests in each opportunity alongside individual investors, aligning its interests with those of the investors, which gives investors a guarantee that OurCrowd will try to pick the best possible deals for investment.
OurCrowd performs rigorous due diligence on the companies seeking funding. Their team of investment professionals assesses the viability, potential risks, and growth prospects of each opportunity before presenting it to the investor community.
When it comes to exits, investors can do so via an IPO or an acquisition event.
Seedrs
Seedrs offers investors the opportunity to invest in startups and early-stage companies through equity crowdfunding. The platform offers curated deals from the UK market across a wide variety of industries, including technology, finance, agriculture, real estate, etc.
Investors on Seedrs can browse through the available investment opportunities and review campaign materials provided by the companies. They can access information such as business plans, financial projections, pitch videos, and other relevant documentation.
If interested, investors can invest in a company by committing funds through the platform.
Each campaign has a minimum investment threshold, based on the maximum capital required by the company and the amount applicable in accordance with financial regulations.
Similarly to other platforms, investors generate returns when the portfolio company goes public through an IPO or gets acquired by another company.
Investor Hunt
Investor Hunt is a major investor database that connects start-ups with a large pool of investors, who can choose to invest in projects individually or as part of a cash pool.
The platform is primarily designed for accredited investors who have sufficient capital and knowledge to make investment decisions individually. However, non-accredited investors can also use the platform.
Each investor sets up their profile where they specify their desired investment per deal, as well as the specific industries they are targeting.
Startups pay a monthly fee to Investor Hunt to export the database with contact information to connect and arrange deals with prospective investors.
Investor Hunt does not directly facilitate private equity investments on its platform, rather, it aggregates a database of thousands of private equity investors and provides start-ups with relevant data to contact them and seek investment.
Wefunder
Wefunder offers private equity access to both accredited and non-accredited investors. The platform lists a number of early-stage companies and startups where users invest in exchange for equity.
Wefunder offers a range of investment opportunities in various industries, including technology, healthcare, food and beverage, and more. Startups and early-stage companies seeking funding can create campaigns on the platform, sharing details about their business, growth potential, financials, and investment terms.
The platform offers Reg CF rounds to start-ups, which enables non-accredited investors to also participate in the offerings.
Investors can access vital information, such as pitch decks, financial projections, and business plans, as well as perks offered by the company to each investor, which is meant to make the experience more rewarding.
Wefunder also facilitates communication between investors and the companies they invest in. Investors can receive regular updates from the companies, ask questions, and participate in discussions related to the investment opportunity.
Private Equity Exits
There are a number of routes investors can take when wishing to exit a private equity investment, which include:
An Initial Public Offering (IPO) - an IPO is a process when a private company lists on a regulated stock exchange, which grants access to considerably more capital and a much broader base of investors. Positive financial performance can greatly boost share prices for initial shareholders, who have bought shares at a considerable discount - netting them substantial returns
Acquisition - a larger company operating in the same industry, or a different private equity firm may acquire the portfolio company and buy out all existing shareholders, which is typically done at a premium
Secondary sale - investors may sell their shares on secondary markets, which offer more liquidity and faster fulfillment than simply waiting for other exit routes
Liquidation - the grimmest method of exiting an investment, liquidation of a portfolio company may result in a restructuring and subsequent sale of the company or may result in the complete loss of the investment
Pros & Cons Of Investing In Private Equity
Before investing in private equity offerings, it is important for investors to consider the advantages and risks associated with such investments. Private equity is a form of alternative asset class, which means that it shares some of the benefits and pitfalls of such assets.
Pros
Potential for high returns - successful private equity investments have a lot of room for growth, which can lead to substantial returns over the long term. Furthermore, private equity often outperforms public markets over a longer time period
Diversification - private equity investments can add diversity to any investment portfolio. Such investments typically have a longer time frame and investors can mix stocks in public companies with investments in private equity. Private companies often sell their shares at a discount, which can lead to substantial gains in the case of an IPO
Long-term focus - private equity investments typically have a longer time horizon, allowing for patient capital. This longer time frame gives companies time to scale up operations and lead to higher returns potentially
Access to expertise - investing in private equity is frequently done alongside experienced investors, which gives individual investors some much-needed expertise to choose better deals in the future
Cons
Illiquidity - most private equity investments are illiquid and not easy to exit, which makes it difficult for investors to make adjustments to their portfolios. However, some platforms offer a more liquid secondary marketplace that allows investors to buy and sell shares in private companies
High capital requirements - many private equity platforms have a relatively high barrier to entry. Depending on the company raising capital, investors may even have an investment threshold of $100,000, which makes it difficult for most investors to access them
Limited transparency - private equity investments generally offer less transparency compared to publicly traded securities. Investors may have limited access to information about the underlying investments, financial performance, and valuation updates. This can make it difficult for investors to accurately evaluate these investments
Higher risk profile - most private equity investments are made in start-ups, which have a high risk of failure. Returns can be highly volatile and investors also run the risk of losing all of their invested capital
Lock-up periods and exit challenges - private equity investments often have lock-up periods during which investors cannot access their capital. Additionally, exiting an investment can be challenging and time-consuming. The process of selling or exiting a private equity investment is subject to market conditions, investor agreements, and the availability of interested buyers, which can lead to delays or reduced liquidity
Key Takeaways From How To Invest In Private Equity
Private equity is a popular alternative investment asset that has gained significant traction over the past decade
Private equity investment platforms range from pre-IPO share marketplaces to equity crowdfunding platforms that are typically available to accredited investors with significant amounts of capital
Such investments carry a lot of risks and are characterized by low liquidity, which can make it difficult for investors to adjust and close their investments
Some platforms, like Forge Global and EquityZen, offer liquid marketplaces for investors to buy and sell private shares more easily
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Many platforms offer investors access to private markets where they can participate in equity crowdfunding rounds and buy pre-IPO shares in a wide range of private companies. In most cases, these investments are reserved for accredited investors with sufficient capital and income.
Are private company investments liquid?
Private companies are characterized by low liquidity, as considerably lower capital exchanges hands in private marketplaces. However, some platforms offer more liquidity to investors than others, as well as more companies to choose from.
Is investing in private equity risky?
Private equity investments are characterized by a high degree of risk, as a majority of such companies are start-ups with a high risk of failure, which gives investors no guarantees of ever receiving returns on their investments.
