What is Indication of Interest (IOI)
An indication of interest (IOI) is an underwriting expression showing a conditional, non-binding interest in buying a security that is currently in registration (awaiting approval by the Securities and Exchange Commission [SEC]). The investor's broker is required to provide the investor with a preliminary prospectus. An IOI in the mergers and acquisition world, meanwhile, has similar intent but is done differently.
BREAKING DOWN Indication of Interest (IOI)
In the securities and investing world, an indication of interest (IOI) is typically expressed in advance of an IPO. It demonstrates a conditional, non-binding interest in buying a security that is currently awaiting regulatory approval (securities in the U.S. must be cleared by the SEC). The IOI is non-binding because it is illegal to sell a security while still in the registration process. The investor's stockbroker is required to provide the investor with a preliminary prospectus. The IOI remains open-ended and is not a commitment to buy.
An IOI comprises expressions of trading interest that contain one or more of the following elements: the security name, whether the participant is buying or selling, the number of shares, capacity and/or price of the purchase or sale. Firms and broker-dealers have the ability to electronically communicate or advertise proprietary or client trading interest in the form of IOIs to the marketplace, either through their own systems or through dedicated trading platforms.
Indications of interest for IPOs are usually accepted on a first come, first serve basis. Because the demand for securities may exceed the supply available to distribute, placing an indication of interest does not guarantee you'll be able to buy into an IPO.
IOI in Mergers and Acquisitions
In the world of mergers and acquisitions, an indication of interest is similar in intent to an IOI for an initial public offering, but with different components. Once again, it is a non-binding agreement, but this kind of IOI usually comes in the form of a prepared letter written by a buyer and addressed to the seller. The purpose is to communicate a genuine interest in purchasing a company. Among other things, an IOI should provide guidance on a target valuation for the acquisition target company, and it should also outline the general conditions for completing a deal. Elements of a typical IOI for mergers and acquisitions often include, but are not limited to:
- Approximate price range; can be expressed in a dollar value range (e.g., $10 million to 15 million) or stated as a multiple of EBITDA (e.g., 3 to 5x EBITDA)
- Buyer’s general availability of funds and sources of financing
- Management retention plan and role of the equity owner(s) post-transaction
- Necessary due diligence items and a rough estimate of the due diligence timeline
- Potential proposed elements of the transaction structure (asset vs equity, leveraged transaction, cash vs equity, etc.)
- Timeframe to close the transaction