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New rule may allow more people to take part in pre-IPO investing

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Pre-IPO investing has always been walled off from most Americans. Under longstanding rules, these stock purchases were generally limited to people deemed “accredited investors” – those with at least $1 million in assets outside the home, or an income of at least $200,000 annually.

2020, however, could see significant changes to the definition of an accredited investor, opening the door for more people to consider a pre-IPO investment.

Loosening the definition of accredited investor

According to a story from the New York Post, the Securities and Exchange Commission (SEC) recently revealed a proposal that would result in more people being considered an accredited investor. The new definition would include people with certain professional credentials, such as certifications or designations, as well as “knowledgeable employees” of private funds.

This could ultimately include licensed financial advisers, private equity employees and even spouses of accredited investors, the New York Post explained.

The goal, according to the SEC, is to open up the (often blazing-hot) pre-IPO investment market to small investors, not just those who are already quite wealthy. This proposed rule was approved by a 3-2 vote, and at the start of 2020 remained open for public comment. It is expected to be officially adopted in the early part of the year.

Pre-IPO investing comes with risks

Anyone considering a pre-IPO investment should know it comes with legitimate risks. As FINRA explains, while the offering might be totally legal, there is a possibility the company never actually completes the IPO. And keep in mind, the price you pay will be based solely on speculation, not actual market value.

Then, of course, there are fraudsters. A representative could intentionally misrepresent certain aspects of a company, its plans and its prospects going forward. Or they may be trying to sell you shares that were illicitly obtained.

In even more severe cases, a fraudster may try to “sell” you shares in a company that doesn’t even exist, or to a business they aren’t affiliated with.

Assuming the SEC’s proposed rule becomes a reality, more people may soon find themselves able to jump into pre-IPO investing. Everyone should approach these deals with caution. Where there are people looking to buy, there will certainly be others hoping to exploit.