Invested in an upcoming IPO? Here are six common questions

The initial public offering (IPO) of a company you’ve invested in can be an exciting or even transformative moment, with significant implications for your wealth. If you’ve just been notified or read in the news that a portfolio company you have exposure to intends to go public, we are here to help.

While some basic details about the IPO can be found in the company’s S-1 form filed with the Securities and Exchange Commission (SEC), other topics that are significant for you personally won’t be addressed in these filings. When companies transition from the private market to the public market, the value and liquidity of your holdings will change, and so will the way the investment is held and taxed. These factors will have important implications for your overall portfolio.

With the IPO market the hottest it’s been in several years, it’s a good time to intentionally review your holdings and find out what an eventual public offering might mean for you.

Here, we’ll answer five/six commonly asked questions you may have ahead of the IPO of a company you’ve invested in. Incorporating these answers into your plans will help you prepare for what comes next.

1. What do I actually own, and what happens at the IPO?

It’s important to know if you have invested in the company directly or indirectly. If you’ve invested directly, you will likely now have direct exposure and greater control over the path of your ownership in the underlying company.

On the other hand, if you’ve made investments in the private market through an intermediary, such as a special purpose vehicle (SPV) or through a fund manager, you didn’t purchase shares when you made your investment. Instead, you (and other investors) have partial ownership of a fund that invested in the company.

In either event, you should understand what you own, how you own it and what may change as the result of the IPO. This shapes your choices in what you can do with your investment and how your portfolio will evolve around it.

2. What happens between the IPO announcement and when I can actually access my investment?

If you’ve invested directly in a company that has recently announced that it intends to go public, your investment likely comes with ownership restrictions that prevent you from selling your holdings before the IPO.

Even if you are directly invested in the company, the completion of the IPO will not necessarily mean immediate liquidity for you. Companies that go public often specify a “lock-up” period during which pre-IPO investors cannot sell their shares. A restriction of 90 days or 180 days after the completion of the IPO is common, but these can vary.

In other words, an IPO may make a company public well before it makes your investment liquid. By informing yourself about the timing and implications of that process, you’ll be better positioned to incorporate the upcoming IPO into your own planning goals.

3. Will I receive public shares, cash—or something else?

The specifics of what you are entitled to receive will likely be spelled out in the terms of your investment. As we’ve noted, if you have invested through an intermediary’s investment vehicle—as many of our clients have—the manager of that intermediary may have significant discretion throughout the IPO process.

While it’s possible you were given the choice to note a preference for receiving a distribution in shares or cash, the manager of the investment vehicle generally retains full discretion on the form and timing of any distribution.

If the manager elects to sell shares following the IPO, or to make an in-kind distribution of publicly traded shares, the tax consequences will depend on the structure of the investment vehicle, the nature and timing of the sale or distribution and your individual circumstances. You should consult your tax advisors regarding the specific tax treatment of your investment. 

In addition to potentially making the decision to distribute shares or cash, managers are also in charge of the timing of distributions. Even if the lock-up period on a newly public company has ended, they will not necessarily have to distribute shares or cash immediately.

4. What could the IPO mean for my taxes?

If you’ve invested indirectly in a company that is going public through an intermediary’s investment vehicle, the tax consequences of the IPO will often depend on the structure through which you made your investment, and on what the intermediary does with the shares after the public offering. 

If the investment vehicle sells shares, taxable gains or losses may be recognized at the investment vehicle level. For pass-through vehicles, such as many partnerships, investors may be required to recognize their allocable share of that gain or loss regardless of whether cash has been distributed to them. 

If you receive shares in an in-kind distribution from any investment partnership, you may not recognize taxable gain solely as a result of receiving the shares, as any gain or loss may instead be deferred until you later sell the shares. However, this treatment depends on the structure of the investment vehicle, the nature of the distributed property, and the application of specific U.S. tax rules.

Your tax basis in distributed shares may not be the same as the IPO price, the stock’s closing price on its first day of trading or the value of the shares on the date you receive them. Instead, it will generally be determined under the applicable tax rules governing the investment structure through which you held the investment.

Investment managers typically provide investors with tax reporting and other information that is relevant to determining the tax basis and holding period of the distributed shares, although the timing and level of detail may vary.

Because an IPO can have significant tax implications both at the time of the offering and when shares are ultimately sold, you should consult your tax advisors to understand the potential consequences and evaluate any potential planning opportunities.

5. If I receive shares, when can I sell—and should I?

The questions of when and whether you should sell are complex, and this is where conversations with trusted advisers can prove tremendously valuable.

Factors you will likely want to consider include:

• What was your original intent for this investment, and how does the IPO relate to that?
• Does any post-IPO increase in value mean you now hold a highly concentrated position? And if so, how would you like to proceed?
• How does the IPO, which converts some of your alternative holdings into public market equities, affect your overall asset allocation and your wealth plan?
• What are your liquidity needs?
• What are your views of the company and its valuation post-IPO, and do you want to hold the stock long-term?
• What will the tax consequences of the IPO be for you?

You’ll want to carefully review your intent for this specific investment, as well as your overall financial goals, with your J.P. Morgan team.

6. What should investors do before the IPO happens?

The IPO may put you in a position to consider new strategies, including gifting and estate planning. Creating a short checklist in consultation with your J.P. Morgan team ahead of time can help you solidify the timeline, firm up your understanding of what you own and what choices are available to you. Here are steps that will be useful in that process:

• Confirm exactly what you own and through which entity
• Map key dates, restrictions and decision points
• Consult with tax and legal professionals
• Evaluate strategies including gifting, charitable planning and estate planning
• Model different outcomes: What if you use a higher or lower valuation?
• Identify decisions that need to be made before rather than after the liquidity event

We can help

As you look forward to a potentially significant moment in your financial or professional life, your J.P. Morgan team can help you understand the outcomes of the IPO and the decisions the process will create—and prepare for them in a way that best meets your goals.