Pre-IPO markets allow participants to trade shares of private companies before their public listing through secondary market platforms.
This is how it works.
Companies that have multiple private funding rounds while also giving stock options to their employees often remain closed to accredited investors only. That is, until they launch in the public market through an IPO.
Pre-IPO markets act as intermediaries between these employees/early investors and regular traders/investors looking for exposure.
Pre-IPO market platforms allow the former party to sell their stock at the most recent private valuation. The pre-IPO market holds custody of the asset, and traders/investors can freely trade it on the platform.
Take OpenAI, for example. It’s a hot stock that many people want to own. The company has had multiple rounds and, in its most recent round, was valued at $300B.
Early employees and investors can sell their stock to pre-IPO companies at this valuation, and anybody can trade the pre-IPO stock based on the valuation.
Why Pre-IPO markets can make a comeback in crypto?
The pre-IPO market concept was attempted earlier in crypto with limited success. The way it works in crypto is very similar to how it would work in traditional finance.
Users can buy using crypto assets (typically stablecoins). They receive a token receipt to represent their ownership, and each token is backed 1:1 with stock equity by the platform itself.
The pre-IPO platform is essentially the custodian, similar to CEXs.
So why is now a good time for pre-IPO products?
- Poor altcoin market
It's no secret that the 2024/25 cycle has been underwhelming. Barring a brief ‘memecoin mania’ phase and some AI slop, things have been nowhere near the heights we expected. All we got was a token launchpad followed by tens of thousands of rugs and scams.
Here’s one example of why things are so bad for alts.
Here are a few more charts to further prove how disappointing the alt market has been.
BTCDOM -
OTHERS/BTC -
Although it’s not all doom and gloom, there seems to be a lack of new money flowing into alts due to the saturation caused by the sheer number of new coins combined with a lack of innovation among protocols. All new money is seemingly only flowing into BTC.
With that in mind, market participants will always look for new ways to earn money. Alas, gambling never stops.
There are many private companies, especially in AI and crypto, that are expected to go public soon. We already know how hyped AI is as a sector, and the recent success of crypto stocks (Circle and Coinbase) also makes crypto relatively attractive at the moment.
On top of that, the private market leaves a lot of room for speculation because the ceiling for most of these companies is really high, at least in terms of hype and speculative value.
If you combine all of this, a pre-IPO market for crypto participants could be an attractive alternative form of investment.
- Improved technology
Over the last few years, the industry has evolved significantly in terms of technology and infrastructure. Blockchains have become more scalable, and the user experience has improved tenfold.
This has not only made it easier for new participants to use blockchains, but it has also made it easier to integrate crypto with web2-based applications.
Put all of this together, and you have the perfect foundation for modern pre-IPO platforms: seamless integration with blockchain technology combined with an intuitive user experience.
- Regulatory clarity
As the industry evolved, so did the regulatory clarity around it. As much as I loved the Wild West of crypto, some regulatory clarity is necessary if we want to integrate the technology with the real world.
In recent years, governments worldwide have gradually begun warming up to crypto, which will greatly benefit crypto pre-IPO platforms.
KYC/AML checks will be introduced as part of it. Beyond that, the companies simply have to comply with the pre-IPO laws of their local jurisdiction. Based on that, they will be allowed to issue tokens for equity.
With regulatory clarity taken care of, companies should be able to scale without any major compliance hurdles hampering their growth in the future.
- Lower barrier to entry
As we know, crypto has a very low barrier to entry when compared to other financial instruments. All you need is a device and an internet connection.
Pre-IPO markets also lower the barrier a step further by essentially allowing participants to invest as little as $1 in a private pre-IPO company.
Individuals with lower capital would typically never come close to getting access to such deals, but the pre-IPO market makes this possible.
With low barriers to entry, those looking to make the most of the pre-IPO hype instead of losing their money on pump.fun shitcoins can do so with relative ease. This is another big market to tap into.
- Longer private market cycles
In recent years, we’ve seen a trend among new-gen companies, specifically those related to tech or AI, that they tend to prolong their time as private companies to maximize the value they can generate prior to IPO.
With the growth potential some of these companies have, staying private increases the speculative demand, allowing some companies to reach the $1B valuation threshold—unicorn status.
As more companies continue to do this, pre-IPO markets will become even more attractive. This means more opportunities to trade/invest and more ways to diversify your investment portfolio.
You also can sell the pre-IPO equity you bought before the company lists publicly. So, if you invest early and the company raises another round at a significantly higher valuation, you can exit prior to listing for a decent profit.
Concluding Thoughts
The pre-IPO sector within crypto is still relatively young.
Conceptually, it’s fascinating, and its implementation is already there. Some examples of projects include Jarsy, PrePO, EarlyBird, Prinx, and Ventuals. Although we haven’t used any of these products and can’t comment on their reliability, they seem to be a great starting point.
Even if you zoom out, the landscape looks ripe for pre-IPO markets to take the lead from the current memecoin launchpad meta.
While there are no guarantees that this will succeed, it’s still a sector that I would pay close attention to.
