Private Placement Stock Issues & Investment Issues

What are private company stock issues, aka PRE-IPO issues? These are private company stock issues offered by a company through a Private Placement Memorandum (PPM), and sold primarily to Accredited Investors. These stock issues are typically not liquid, as they are not traded on any of the stock exchanges. The investor’s goal is to have the company’s stock traded on the public stock market, or for the company to be acquired by a publicly traded company. These events are referred to as liquidation events, where the investor can sell his or her shares.

Why do investors purchase private company stock? The potential returns can very high, as can the risks. If the investor cannot afford to lose their entire investment, he or she should not invest in private company stock. This category of stock can be highly rewarding, if the investor has the capability to conduct strong due diligence procedures. Private company stock is also the category where Warren Buffett has made most of his fortune.

How do I conduct due diligence on these type of stock issues? Most individual investors do not have the resources or time to conduct extensive due diligence procedures. The prudent investor will invest in issues where a major institutional investor has already done their due diligence, invested money, and has representation on the company’s Board of Directors. In other words, the prudent investor looks for a Lead Investor.

What else should I look for in the company? Look for a strong management team who has done it previously and high profile Board of Directors. Frequently, these board members have a high individual net worth and will require the Company to take out very expensive D&O (directors and officers) insurance, and/or E&O (Errors and Omission) insurance. Make sure that the company’s product and/or service is fully developed and being sold successfully. R& D companies may offer the investor the opportunity for substantial potential returns, but this must be weighed against the additional risks of their inability to currently market their products or services.

What type of company should I consider investing in? It is important for you to understand the basic technology and the benefits of the company’s technology. Look for companies with intellectual properties, patents pending or newly issued patents.

Where do I find these types of investments? There are a number of ways to find these investments; many investors study investment newsletters, attend investment conferences, and/or take recommendations from other investors or an investment advisor. These investments are not usually offered by Broker Dealers.

Investment in Oil & Gas programs. Oil & Gas partnerships typically offers significant tax benefits, and depending upon the product produced by the wells and the market price of oil, royalty checks. Look for companies offering a recorded deed of your shares, history of the company, and regular royalty payment history.