Pre-IPO investing, IPO allocations, and Post-IPO trading: key differences for investors

Understanding Pre-IPO investing, IPO allocations, and Post-IPO trading

Investors can gain exposure to a company at three stages: before it goes public (pre-IPO), during the IPO process, or after shares begin trading on a public exchange.

Private companies raise capital from founders, angel investors, venture capital firms, and other private investors. As they prepare for a public listing, they are often referred to as pre-IPO companies.

An IPO is the process of transitioning from private to public ownership. Investors who receive an IPO allocation or IPO early access purchase shares at the offering price before public trading begins. However, allocations may be limited, especially when investor demand exceeds the number of shares available.

After the IPO, shares trade on a public exchange, allowing investors to buy and sell them at market prices. The key differences between pre-IPO investing, IPO allocations, and post-IPO trading are timing, access, liquidity, available information, and pricing.

Three ways to invest in a company around an IPO

When comparing IPO vs. pre-IPO investing, it can be helpful to think of investing opportunities as occurring across three distinct stages of a company's journey to the public markets.

Understanding these three entry points can help investors evaluate where they may fit within a company's lifecycle and what risks and opportunities may be associated with each stage.

Pre-IPO opportunities have historically been difficult for individual investors to reach. This summer, Questrade is bringing pre-IPO access to eligible accredited investors — a category once reserved for institutions and ultra-high-net-worth clients to qualified self-directed investors in Canada.

What is a Pre-IPO investment? 

A pre-IPO investment generally involves purchasing shares in a company before it completes an initial public offering.

The term pre-IPO shares refers to shares acquired while the business remains privately held. These shares may be obtained through funding rounds, employee equity programs, private placements, or secondary market transactions.

Many pre-IPO investors gain access through relationships with venture capitalists, private equity funds, hedge funds, or other specialized investment vehicles. Some opportunities may also be available through platforms that facilitate participation in private markets.

Because the company remains private, transactions involving private company shares often occur through negotiated agreements rather than through a centralized exchange.

In certain cases, existing shareholders may choose to sell pre-IPO shares through a private secondary market. Depending on the structure of the investment and the platform used, these transactions may provide a degree of liquidity before a company enters the public market — though access, transfer restrictions, and the ability to sell can vary significantly from one arrangement to another.

What is an IPO?

An IPO occurs when a company offers shares to public investors for the first time.

Through the IPO process, businesses may seek to raise capital, increase public visibility, create liquidity opportunities for shareholders, or support future growth initiatives.

Before shares begin trading, investment banks typically work with the company to determine offering details, prepare regulatory documentation, and market the offering to potential investors.

Once the offering is completed, the company's shares become publicly traded and can generally be bought and sold through a brokerage firm in the broader stock market.

After the IPO, investors may purchase IPO shares on the public market, subject to availability and market conditions.

The main difference: how shares are valued and priced 

Across all three stages, a key distinction is how a company's share price is determined.

Pre-IPO valuations are typically established through private funding rounds and may be influenced by factors such as revenue growth, business performance, comparable companies, market conditions, and investor demand.

IPO pricing is determined by the company and its underwriters based on investor demand, company fundamentals, market conditions, and valuations of comparable public companies.

Post-IPO prices are set by the public market and fluctuate continuously based on buying and selling activity, investor sentiment, and broader market conditions.

Who participates in Pre-IPO markets?

The pre-IPO market includes a range of investors and institutions, although access is generally more limited than investing in publicly traded stocks.

Participants may include:

• Accredited investors, who meet certain financial criteria under National Instrument 45-106 — such as financial assets (before taxes, net of related liabilities) exceeding $1,000,000, net assets of at least $5,000,000, or net income before taxes exceeding $200,000 ($300,000 with a spouse) in each of the two most recent calendar years, with a reasonable expectation of the same in the current year.

• Venture capital firms, which invest in startups and growth-stage companies.

• Private equity firms, which often invest in larger, more established private businesses.

• Institutional investors, such as pension funds, endowments, sovereign wealth funds, insurance companies, and asset managers.

• Hedge funds, particularly those seeking exposure to companies approaching a public listing.

• Existing shareholders, including founders and employees who may participate in secondary share transactions.

Pre-IPO investment opportunities may be available through private funding rounds, venture capital or private equity funds, secondary market transactions, and specialized private market platforms. Depending on the offering, participation may be subject to investor qualifications, minimum investment requirements, transfer restrictions, and other conditions.

By comparison, IPO shares and publicly traded stocks are generally accessible to a broader range of investors through brokerage accounts, although IPO allocations may be limited when demand exceeds the number of shares available.

How liquidity works before and after an IPO

Liquidity refers to how easily an investment can be bought or sold.

Before an IPO, shares are typically bought and sold through private transactions, which may involve fewer buyers, transfer restrictions, and negotiated pricing. As a result, selling shares can be more difficult and may take longer.

After an IPO, shares trade on a public exchange, making it easier for investors to buy and sell shares through brokerage accounts at market prices. However, some shareholders may be subject to lockup periods that temporarily restrict sales.

These differences in liquidity are one reason pre-IPO investments often involve longer holding periods than publicly traded stocks.

Common misconceptions about IPO and Pre-IPO investing

IPO and pre-IPO investing often attract attention, especially when well-known companies are involved. However, several misconceptions can influence how these opportunities are perceived. Understanding the differences between private and public market investing may help create more realistic expectations.

“Pre-IPO always means a lower price”

Some investors assume pre-IPO shares are available at lower valuations simply because a company has not yet gone public.

In reality, private company valuations may already reflect strong growth expectations, investor demand, and previous funding rounds. Many late-stage private companies can achieve substantial valuations before an IPO takes place.

As a result, investing before a public listing does not necessarily mean gaining access to shares at a lower valuation than future public market investors.

“Pre-IPO investors can sell immediately after an IPO”

An IPO does not always create immediate liquidity for existing shareholders.

Many pre-IPO investors, founders, and employees may be subject to lockup agreements or other transfer restrictions that limit when shares can be sold. Depending on the structure and applicable regulations, these restrictions may continue for months after a company becomes publicly traded.

“All investors can access Pre-IPO shares”

Pre-IPO opportunities are often more restricted than publicly traded investments.

Eligibility requirements may apply, and access can depend on factors such as accredited investor status, offering structure, jurisdiction, and platform requirements. Availability may also vary from one opportunity to another.

“A popular company always makes a good investment”

Well-known companies often attract significant investor interest, but popularity alone may not reflect the underlying investment characteristics.

Factors such as valuation, financial performance, competitive position, growth prospects, and business execution may all influence investment outcomes. Public attention and investment fundamentals do not always move in the same direction.

Understanding these distinctions may help investors develop a more balanced perspective on both IPO and pre-IPO opportunities.