What The IPO Grey Market Is And What Purpose It Serves
Many investors are not aware that an Initial Public Offering (IPO) grey market (IPO grey market) exists in many countries around the world. The IPO grey market exists for a variety of reasons. The two primary reasons why the IPO grey market exists is so that accredited investors can obtain shares in a company before an IPO while the shares are privately traded and so IPO underwriters can assess how strong demand is for an IPO to determine the correct amount of shares to offer and pricing for an IPO. Some countries have stronger IPO grey market traditions than others, with the United States and India having particularly strong IPO grey markets.
The IPO grey market is an over-the-counter financial securities market that involves private stock transactions amongst accredited investors before an IPO occurrs. For example, prior to the Facebook IPO, Facebook shares traded on private stock trading platforms between sellers of Facebook’s pre-IPO stock and accredited investors that wanted to buy Facebook’s pre-IPO stock. This IPO grey market for Facebook’s private pre-IPO stock helped the Facebook IPO underwriters gauge demand for the Facebook IPO and what price the market would accept for Facebook IPO shares.
How To Trade The IPO Grey Market
The rules for trading the IPO grey market vary from country to country. Trading the IPO grey market in the United States via private stock trading platforms, such as SharesPost or SecondMarket, can only be done by accredited investors. An accredited investor is an investor with a net worth of at least One Million United States Dollars (which excludes an investor’s personal residence) or can prove that they had an income of more than $200,000 per year ($300,000 for married couples) for two or more years, and a reasonable expectation that they will continue to meet the accredited investor net worth or earning thresholds in the future. These thresholds shut many individual investors out of the IPO grey market. Individual investors interested in buying stocks in the IPO grey market should contact accredited investors that run hedge funds to see if they can invest in a fund that buys IPO grey market stocks.
Since shares that trade in the IPO grey market are not registered with the United States Securities and Exchange Commission (SEC) and are not subject to all the rules and regulations that publicly traded stocks are subject to, investors need to understand that the risk of losses from unexpected corporate events is elevated when stocks are purchased in the IPO grey market. Also, there is no guarantee that a stock that trades on the IPO grey market will ever actually undergo an IPO and become a publicly traded stock or that it will increase in value, so proper precautions against investing too much money in the speculative IPO grey market should be taken.