What Is Fully Subscribed?
Fully subscribed is the position a company finds itself in once all the shares of its initial bond or stock offering have been purchased or guaranteed by investors. An underwriting company usually facilitates these initial bond or stock offerings on behalf of younger companies that are making their initial public offerings (IPOs).
- Fully subscribed is the position a company finds itself in once all the shares of its initial bond or stock offering have been purchased or guaranteed by investors.
- An underwriting company usually facilitates these initial bond or stock offerings on behalf of younger companies that are making their initial public offerings (IPOs).
- A fully subscribed offering is the goal of an initial offering.
- A fully subscribed offering prevents a company from having shares left over that they cannot sell after they go public, or shares that must undergo a price reduction to be purchased by investors.
- Deciding the offer price at which the shares will be sold by the issuing company is key to ensuring a fully subscribed (or even oversubscribed) IPO. IPOs are often underpriced for that reason.
Understanding Fully Subscribed
A fully subscribed offering is the goal of an initial offering. It prevents a company from having shares left over that they cannot sell after they go public, or shares that must undergo a price reduction to be purchased by investors.
To determine an offering price, underwriters must first research and determine what amount potential investors will be willing to pay per share. This can be done in several ways, but it is often determined by polling potential investors beforehand.
There is some flexibility for the underwriters to make changes to the stock offering price based on what they think the demand will be—but they walk a tight rope to make sure that they are hitting the right price point to achieve a fully subscribed offer.
A price that is too high can result in not enough shares being sold. A price that is too low can result in an inflated demand for the shares. This can lead to a bidding situation that may price some investors out of the market. These circumstances are also known as underbooked and undersubscribed or overbooked and oversubscribed, respectively.
Another expression sometimes used for fully subscribed is the slang term "pot is clean."
How to Ensure a Fully Subscribed IPO
Once the IPO has been approved by the SEC, and one day before the effective date, the issuing company and the underwriter decide the offer price and the number of shares to be sold. Deciding the right price at which the shares will be sold is key: an underpriced IPO will attract investors. However, a higher price will mean a higher margin of profit for the issuing company.
Factors like the success of the marketing campaigns and roadshows, the issuing company's goal, and the overall condition of the market will impact the offer price.
To ensure that an IPO is fully subscribed or even oversubscribed issues are usually underpriced, even if this results in the issuing company not receiving the full value of its shares. Also, underpriced IPOs compensate investors for the risk they are taking.
If the shares are underpriced, investors expect a rise in the price on the offer day, which increases the demand and the chances to have an oversubscribed offer.
A roadshow is a sales pitch to potential investors made up of a series of presentations leading up to an IPO. They generally take place in major cities, where potential investors are introduced to the company, its history, and its key personnel. The goal of the roadshow is to generate excitement about the company, so they can be critical to the success of an IPO.
Example of Fully Subscribed
Consider that Company ABC is about to go up for public offering. There will be 100 shares available. The underwriter has done their due diligence and determined that the fair market price is $40 per share. They offer these shares up to investors at $40 each, and the investors agree to buy all 100 shares. The offering for ABC is now fully subscribed, as there are no remaining shares to sell.
If the underwriters had priced the shares at $45 per share—to try and make a higher margin of profit—they may have only been able to sell half of the shares. This would have left the stock undersubscribed, with half of the stock remaining unpurchased and subject to being re-offered at a lower rate, for example, $35 per share.
Additionally, if the underwriters had originally priced the shares at $35 per share to hedge their bets, and guaranteed that all shares sold since they were priced aggressively, they would have shorted the ABC company $500 in this transaction, or $5 per share. They would have also run the risk of creating a bidding situation where some of their potential investors would be priced out of ABC’s stock.
What Happens When an IPO Is Oversubscribed?
An IPO is said to be oversubscribed when the number of shares offered by the issuing company is less than the investors' demand. When this happens, the company can offer more shares, raise the price of the stock, or both. This will increase the margin of profit for the issuing company.
What Happens When an IPO Is Not Fully Subscribed?
When an IPO is not fully subscribed, the offer price is often lowered to increase the interest among the investors. The main drawback of an under-subscription situation is that the issuing company won't be raising the expected capital.
Can You Sell an IPO Immediately?
It depends. Retail investors who invest in a company right after it goes public are generally allowed to sell their shares immediately after they buy them. IPO investors, however, may not be allowed to sell their IPO shares for a certain period after the company goes public. This is called the "lock-up period": it usually applies to insiders and, although it varies on a case-by-case basis, it is typically 180 days.
What Is a Grey Market IPO?
A grey market IPO is one where a company’s shares are bid and offered by traders unofficially. Therefore, there are no rules or regulators like the SEC. Grey market IPOS are generally run by a small group of individuals.