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 has similar intent but is done differently.
- Indications of interest (IOIs) are nonbinding agreements to buy a security once available.
- These securities are expressed during IPO registration.
- Stockbrokers are the ones who place the IOI in place.
- Even though these are nonbinding, it is 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) Work
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.