Risks of Pre-IPO investments: where the beautiful story ends and reality begins

Pre-IPO investment risk is the chance of losing money on a private company's shares, and it can materialise even when the business grows. The main sources are an entry price that is too high, no buyer when you need to sell, an IPO that comes late or never, terms that favour other shareholders, layered fees and fraud.

What are the main risks of a pre-IPO investment?

They fall into six groups. Only the first is about the business itself; the other five depend on the price and terms of a particular deal.

The basics of how these deals are arranged are covered in what pre-IPO is and how the market works.

Why does the entry price matter more than the company's name?

Because your return depends on what you paid, not only on whether the company succeeds. A company can grow, go public and still be worth less than at the round you joined.

Chime is an example. Its 2021 funding round valued it at $25 billion. It went public in June 2025 at an $11.6 billion valuation, and even after a 37% first-day rise its market value was $13.5 billion, CNBC reported. That was roughly half the 2021 figure. For investors who came in during 2019, at a $1.5 billion valuation, the company's value had grown about ninefold.

A private round price is negotiated, often for preferred shares with extra rights, and a secondary price can differ from it markedly. The SEC notes that limited disclosure may leave investors without the information to judge whether the price asked is fair. The metrics worth checking are in how to evaluate a pre-IPO company.

What if you need to sell before an IPO?

You may not be able to. The SEC's bulletin on private placements calls them highly illiquid and says investors may need to hold such securities indefinitely.

The resale rule investors commonly rely on requires holding restricted securities for at least a year if the company does not file periodic reports with the SEC, and most private companies that issue private placements do not. After that you still need a buyer. FINRA adds that many private companies must approve any transfer of their shares, and without that approval the transaction might be void. The available exit routes are compared in how to exit a pre-IPO deal.

What if the IPO comes late or never?

Then the money stays locked up, and the SEC's pre-IPO investor alert warns that the company may never go public at all.

The market does not follow an investor's calendar. In Jay Ritter's IPO data, the number of US operating companies going public fell from 311 in 2021 to 38 in 2022, and the median company that listed in 2025 was 12 years old. Even after an IPO, earlier shareholders usually sign a lock-up, most often for 180 days. How an IPO turns into a return is explained in how an IPO works and what investors earn.

How can the deal structure work against you?

Through the rights attached to your shares and the layers between you and the company.

• Liquidation preference. In a sale of the company, holders of preferred shares with a preference are paid before common shareholders, so the class you hold matters.
• Dilution. New funding rounds and option pools reduce each existing holder's percentage of the company.
• Fund layers. FINRA's guide to pre-IPO funds warns that a fund may hold the stock indirectly, leaving you several layers removed from the shares, and that acquiring such interests can involve significant costs.
• Information. When an issuer sells only to accredited investors, it decides what to disclose, and offering documents are typically not reviewed by any regulator.

What do pre-IPO scams look like?

They sell urgency and access. The SEC warns about claims that an IPO is "imminent" or will happen "this year", promises of no upfront fees that hide large markups, and sellers who may not own the shares they offer.

• The offer is unsolicited: a cold call, an email or a social media message.
• The seller is not registered; this can be checked on Investor.gov or FINRA's BrokerCheck.
• The pitch leans on a trending theme, such as artificial intelligence or crypto assets.
• An unregistered offering has no investment limits and no income or net worth requirements.

The SEC keeps bringing cases: in June 2024 it charged three New Yorkers with raising more than $184 million through pre-IPO fraud schemes.

How can you check a pre-IPO deal before investing?

By turning the story into questions that have documented answers.

1. What exactly do I own: shares in the company, or units in a fund or SPV that holds them?
2. What price am I paying compared with the last round and recent secondary trades, and for which share class?
3. Which rights come with it: liquidation preference, information rights, transfer restrictions?
4. What are the fees at every layer between me and the company?
5. How could I exit, and when: an IPO and lock-up, a tender offer, a secondary sale or an acquisition?
6. Is the seller registered, and does it actually hold the shares?

The SEC suggests two more questions: are you comfortable holding the investment indefinitely, and could you afford to lose most or all of it if the company failed? Risks that remain after a company lists are covered in IPO risks.