SpaceX IPO May Signal Return of Pre-IPO Transfers
The news that SpaceX’s initial public offering (IPO) has finally been priced at $135 per share and a pre-money valuation of $1.75 trillion could herald a new IPO era. If so, it might be time to dust off the pre-IPO transfer as a discount planning tool.
Looking back to the late 1990s, a significant portion of trust planning work involved transactions in shares that were about to become public. Pre-IPO transactions offer fairly predictable initial results, since (usually) the IPO price is known or has been signaled in advance. And pre-IPO discounts, while variable, are somewhat predictable and can be estimated upfront. This allows transfers to take place pre-offering without waiting for formal appraisals, and a discounted valuation report can be produced after the fact, but in time for a 709 filing.
Pre-IPO Discounts
Luckily, several data vendors provide pre-IPO transaction data, and many studies of pre-IPO transactions have been published. In the valuation literature, these are often assumed to reflect only a lack of marketability and are applied accordingly when determining discounts for lack of marketability (DLOM). In reality, pre-IPO transactions discounts may result from the combined effect of: (1) the lack of marketability of the shares, including the expectation that the shares being transferred prior to the offering will be locked up for some time (typically, 180 days) whereas the shares offered in the IPO are unlocked; (2) value appreciation between the pre-IPO transaction date and the IPO; and (3) the risk that the IPO will be unsuccessful.
Conversely, when pricing shares transferred just prior to an IPO, such data and studies are quite useful and almost certainly the most appropriate evidence there is. And the discounts indicated can be quite significant. As an example, here are the discounts cited in a standard valuation textbook:
An IPO Boom?
With the significant wealth creation among technology companies during the past few years, IPOs have been surprisingly few and far between. Consider the massive boom in IPOs in the 1990s: most years averaged 300 to 800 IPOs. In the 2020s (ignoring special-purpose acquisition companies), IPOs have been in the double digits to low triple digits per year. But at some point, the private investors accumulating large fortunes in tech unicorns will want to see liquidity, or their limited partners will want to. So the most successful ones will eventually have to go public. And when they do, wealth advisors can resume making pre-IPO transfers more regularly. Will SpaceX be the starting gun for the 2020s IPO boom? That remains to be seen.