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How to Invest in a Private Company at a Better Price

The SEC approves an alternative to IPOs

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For many people who want to invest when a private company offers its stock to the public, the huge gap between the price paid by institutional and retail investors is prohibitive - not to mention unfair. 

The SEC agrees, and has approved a new rule for companies to go public designed to solve this pricing gap: primary direct listing on the NYSE. 

No more 2nd class status for retail investors.

Primary Direct Listing eliminates the discriminatory price gap of IPOs.

Retail investors who want to participate in an IPO often must pay a significantly higher price than institutional investors. For example:

Airbnb Inc., opened its first day of trading for retail investors at $146 a share.

The night before, institutional investors paid only $68 a share.

A new way for companies to raise capital, designed to eliminate the price gap common in traditional initial public offering (IPOs), has been approved by the U.S. Securities and Exchange Commission (SEC).

Companies may now raise capital via a primary direct listing on the New York Stock Exchange (NYSE). Under the NYSE plan, companies can sell primary (new) shares directly on the exchange in an auction.

An auction will increase opportunities for more investors to purchase shares at a price closer to the listing price, rather than having to wait until after the institutional allocation to buy at an exaggerated premium.

The rule is also intended to avoid the “mispricing” of IPOs which can hurt company founders and first employees. In the case of Airbnb, the pricing difference cost the company and its early investors $4 billion.

Eliminating the IPO price gap will help investors who may find it difficult to ride the volatile price swings of even the most long-term advantageous IPOs (see below). Consider the plight of investors in the IPO of Facebook ($38). Many found it impossible to hold the stock as it declined to $17.73, only to miss out on its upward trajectory ($268). A direct listing should yield more accurate pricing and a better risk-reward entry point for long-term investing.

The Bottom Line: An alternative way for private companies to offer stock was approved, and hopefully will be used by companies going public to eliminate pricing discrimination. 

If you choose to participate in a traditional IPO, please consider our guidance:

Don't invest on IPO day based on FOMO (fear of missing out) or the reporting of an artificial price pop. The price of most IPOs has trended lower after the first day of trading (see below examples). This trend can present a more advantageous risk-reward entry point to support holding the investment through historically expected short-term price swings for long-term benefit.

 

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