What Is an 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. However, IOIs in the mergers and acquisitions world have similar intent but are done differently.
- Indications of interest (IOIs) are nonbinding agreements to acquire a company or buy a security once available.
- These securities are expressed during IPO registration.
- For investments, stockbrokers put the IOI in place.
- Even though these are nonbinding, IOIs constitute serious inquiries only.
- Expressing interest in an IOI does not provide any guarantee of the security once it reaches the IPO.
How an Indication of Interest (IOI) Works
In the securities and investing world, an indication of interest (IOI) is typically expressed in advance of an IPO (initial public offering). 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-served 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.
An IOI is not a legal obligation to purchase, but it will give the investor a general idea of how the company is doing financially. This will help the decision process of buying in or not.
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 the 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.
Indication of Interest (IOI) vs. Letter of Intent (LOI)
An indication of interest (IOI) is an informal notice of an investor's interest in purchasing or acquiring an asset. It is non-binding and less definitive than a letter of intent (LOI). The indication of interest includes value ranges and less specific details of the transaction. The IOI, coming before the LOI, begins the negotiation process.
At the end of negotiations, the formal Letter of Intent (LOI) is created, defining the specific details of the transaction. Like the IOI, it is not a legally binding agreement; rather, it expresses the investor's commitment to purchase a security and serves as the foundation for the formal contract.
Upon review, if the seller accepts the terms of the LOI, an agreement can be made. Upon execution, the seller enters an exclusive agreement with the buyer, prohibiting them from engaging with other buyers for a period.
Either party to a transaction can terminate negotiations since IOIs and LOIs are non-binding.
Example of an Indication of Interest
In May 2008, Blackbaud's CEO Marc Chardon submitted a revised IOI to Richard LaBarbera, President and CEO of Kintera, Inc., expressing interest in acquiring 100% of his company. In the notice, he asked for a time-bound exclusive deal in exchange for a higher all-cash offer.
Details included in the IOI included the purchase price of $1.12 per share, its commitment to an all-cash offer, approvals and closing conditions, a management retention plan, and an estimated closing date of July 1, 2008. In its management retention plan, it proposed that Kintera's CEO and some executives and senior managers would receive employment agreements.
In addition, the IOI outlines the exclusivity conditions. It states that until the purchase agreement is executed or when the purchaser terminates negotiations, Kintera may not enter into an agreement with a third party regarding an acquisition, discuss or negotiate with a third party, provide information about Kintera to a third party, solicit proposals, or allow representatives of the company to engage in any of these prohibited activities.
The end of the notice listed the binding provisions, including the notice's termination date (May 21, 2008) and statements about the IOI being a non-binding precursor to an agreement.
Indication of Interest FAQs
What Is an Actionable Indication of Interest?
An actionable indication of interest is an IOI that provides specific details about the purchase. Such details include the security's symbol, a price comparable to or exceeding the National Best Bid and Offer (NBBO), size, etc.
Who Can Cancel an Indication of Interest?
The buyer submitting the notice can cancel the indication of interest (IOI). If left unconfirmed beyond the confirmation period, it will cancel automatically.
What Is a Natural Indication of Interest?
A natural indication of interest occurs when IOI originates with the customer, rather than a firm. FINRA further defines it as referring "either to customer interest a firm represents on an agency basis or to proprietary interest that was established to facilitate a customer order or as part of an execution of a customer order on a riskless principal basis."
The Bottom Line
An indication of interest (IOI) is a brief letter or notice that expresses a buyer's interest in buying a security in registration or a company's interest in acquiring another company. For investments, the IOI precedes the IPO, and in finance, it precedes the letter of intent (LOI). Although it is not a formal agreement, it carries weight as it communicates the serious interest of the buyer.