By Sarah Morgan
Those itching to invest in Twitter don’t need to wait for the company’s IPO.
The social-media site likely won’t go public for at least a year or more, because management wants to wait until they have steady earnings growth, the Wall Street Journal reports today.
But there are a few ways for individual investors to get a stake in companies like Twitter before they go public.
For starters, it helps to be wealthy. To buy shares of a private firm, one must be an “accredited investor” with a net worth of at least $1 million (not including the value of one’s primary residence). Alternately, such investors need to demonstrate an annual income of at least $200,000 for the past two years, with a “reasonable expectation” of earning the same in the upcoming year. The restriction is meant to protect smaller investors who can ill-afford to lose money betting on a company that’s not required to make the same kinds of regular financial disclosures that public companies must.
Pre-IPO investing is risky, but pros say it can also be very rewarding. “The secret on Wall Street is that’s where the money is really made,” says Robert Russell, the president of Russell & Company. He says many of his high-net-worth clients invest in pre-IPO companies through private equity funds, but that it’s best to make this kind of investing a relatively small piece of a diversified portfolio. “We’re trying to shoot the lights out here, and that doesn’t always work. You may get zero back, or you may get 100%,” he says.
Smaller investors could also consider buying the publicly traded stock of a private-equity firm to get some exposure to the pop when a firm successfully takes a portfolio company public. But they won’t reap as much of the benefits from these deals as investors with access to the private fund, and their investment will be more correlated with the overall stock market, Russell says.
Investors who meet the accredited-investor cutoff and want to buy stock in a fledgling social media company have a couple of options. There are secondary markets online, including SharesPost and SecondMarket, where early-stage investors and employees can sell shares of private companies to fellow accredited investors. Buyers should know that private-company stock often comes with restrictions on when and to whom it can be re-sold, and the value of these shares could be diluted if the company brings in new investors later. “You’ve got to do your homework,” Russell says. Investors would want to find out who’s selling, and why. “Why are they selling if it’s good?” he notes.
Wealthy individuals can also join “angel investor” groups and become one of those early-stage investors themselves. These groups allow accredited investors to pool their money and their business expertise, and invest together in new companies. Participants might need to pony up anywhere from $25,000 to $100,000 to join.
For smaller investors, it’s much harder to get in on a pre-IPO stock. Mutual funds do occasionally invest in private companies. For example, T. Rowe Price participated in one of Twitter’s funding rounds, and the company split the shares it bought among several funds. A spokeswoman for T. Rowe Price says Twitter stock represents a very small portion of any given fund’s total portfolio.
Those tiny slices might be the closest non-accredited investors can get to Twitter — unless Congress changes the rules on who’s allowed to buy private-company shares. The House has passed, and the Senate is currently considering, so-called crowdfunding bills that would relax some of the restrictions on private-company investing. The bills would allow new businesses to raise money online from small investors, with a limit on how much money any individual could risk.