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).

Key Takeaways

  • 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.

How Fully Subscribed Works

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 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 which 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."

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 reoffered 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.