Private companies often choose to go public in the country that offers the brightest prospects for a successful IPO. Sometimes, that means getting listed on a stock exchange in the company’s home country — but sometimes it makes more sense to list in a foreign market.
So, while many U.S. investors focus primarily on domestic companies, it’s also possible to invest in an international IPO.
Likewise, foreign companies can choose to launch their IPO on U.S. stock exchanges, such as the New York Stock Exchange (NYSE) or Nasdaq. And in some cases, a company could choose to do both through a global IPO.
Investing in IPOs, international or domestic, may appeal to certain investors who want more geographic diversity within their portfolio, and understand the risks of doing so. Knowing how these IPOs work and where to find them is the first step.
What Are International IPOs?
An international IPO is an initial public offering from a private company that takes place outside of that company’s home country. For example, a company based in South Korea decides to go public but instead of listing on the Korea Exchange (KRX), it wants to list on an American exchange.
If the company successfully meets the regulatory requirements established by the Securities and Exchange Commission (SEC), it could move forward with an international IPO. International investors could then purchase shares of the company once it begins trading on the NYSE or Nasdaq.
In most cases, an investor must apply or qualify to buy IPO shares through their brokerage, as these stocks can be restricted in certain ways, limited in quantity, and come with a much higher risk level than other types of stocks.
There are a number of reasons and companies may choose an international IPO. Those include:
• More lenient regulatory requirements for securities on a foreign exchange than those of the home country.
• Better prospects for raising capital through an IPO on a foreign exchange.
• More credibility versus listing on its home country’s exchange.
The most important thing to keep in mind with foreign companies that list on U.S. stock exchanges is that they must complete the IPO process just like a domestic company would.
💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.
Understanding IPOs
When discussing IPOs, “international” refers to public launches involving companies that are foreign to the market they plan to list in. But what is an IPO in general?
In simple terms, an IPO represents the first time that a private company allows investors to purchase shares on a public stock exchange.
Why do companies choose to go public? The answer can depend on the company and its overall business plan. In most cases, the answer is to raise capital so the company can continue to grow and expand. Companies don’t enter into the IPO process lightly, however, as it can be time-consuming and costly.
In the United States, the SEC regulates the IPO process. An IPO can take upwards of a year to complete, as the company moves through the various phases, including:
• Due diligence
• SEC review
• Road show
• Valuation
• Launch
International IPO Funds
With domestic companies, it’s possible to purchase IPO stock on the day the company goes public, using an online brokerage account. In the case of companies that offer pre-IPO placements, it may also be possible to purchase shares before they’re made available to the market at large. Effectively, you’re investing in a private placement.
When investing in international IPOs, you may choose to invest through IPO mutual funds or international exchange-traded funds (ETFs) instead. You might go this route if you want more diversification, or if you don’t have access to IPO shares.
When comparing international IPO ETFs or international mutual funds, it’s important to consider a few things, including:
• Underlying holdings (i.e. which sectors does the fund include, what countries does it offer exposure to)
• Management style (i.e. active versus passive)
With either type of fund, you’d also want to consider the track record and performance, particularly in the case of actively managed funds with a higher expense ratio. This can help you determine if a higher returns justify a higher expense ratio.
💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.
International IPO ETFs
What is an exchange-traded fund (ETF)? An ETF is a type of pooled investment that combines features of both mutual funds and stocks. Essentially, it’s a mutual fund that trades on an exchange like a stock.
This feature makes ETFs different from mutual funds. However, like mutual funds, ETFs have an expense ratio that reflects the annual cost of owning the fund over the course of a year. ETFs can follow an active or passive management strategy, with some funds using an index-based approach.
For some investors, international ETFs that concentrate holdings on companies that go public in foreign markets could make sense since they provide diversified exposure to newly listed non-U.S. companies in a single investment vehicle.
International IPO Mutual Funds
Mutual funds are also pooled investments, meaning multiple investors contribute funds used to buy underlying securities. Each investor in the fund assumes a share of the fund’s earnings (or losses), based on the number of shares they own.
The key difference between mutual funds and exchange-traded funds is how they’re bought and sold. Rather than trading on an exchange like stocks, traders settle mutual fund transactions once a day.
Mutual funds that invest solely in international IPOs may be harder to come than international IPO ETFs. But there are mutual funds that focus on international holdings.
How to Find International IPOs to Invest In
You may be able to purchase international IPOs or international IPO funds through your brokerage account.
To find potential investments, you might use an online resource like the Nasdaq IPO calendar, which lists all upcoming IPO dates. This can help you identify potential investment opportunities for upcoming international IPOs or global IPOs. Investing websites that report on the latest market trends and news offer another way to gain information about foreign companies that are pursuing international IPOs.
Recommended: How to Find Upcoming IPO Stocks Before Listing Day
Key Things to Consider When Investing in International IPOs
If you’re looking to international IPO funds for investment, consider the following:
• What the fund holds (both the companies and the geographies)
• The expense ratio, or costs associated with the fund
• The fund manager’s strategy (or the index it follows)
• If you’re investing in multiple international IPO funds, consider whether there’s any overlap in the holdings that might reduce your diversification
Evaluating international IPOs is similar to evaluating domestic IPOs. The company’s prospectus provides important information about the offering. Though keep in mind that a red herring prospectus may not disclose full details about the company’s financials or organizational structure.
It’s also important to consider risk factors unique to a foreign company that could affect its IPO outcome. A company located in a country that’s experiencing geopolitical turmoil or economic impact related to climate change, for instance, may have a higher risk profile than a company that isn’t facing those types of threats. So getting familiar with a company’s economics, politics and geography may be helpful before investing in an international IPO.
The Takeaway
IPOs allow investors to get in on the ground floor of an up-and-coming company. Whether you choose to invest in domestic IPOs or international IPOs, it’s important to understand, however, that they can also represent a riskier investment than an established public company.
International IPOs come with their own special set of concerns. While qualified U.S. investors may have access to IPO shares, it’s important to read the prospectus of international companies carefully, understand the product and the market you’re investing in, and vet the terms of any IPO international stock before you choose to buy it.
Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.
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Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.
New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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