What is Oversubscribed?

Oversubscribed is the term for when the demand for an IPO's shares is greater than the number of shares issued. When a new security issue is oversubscribed, underwriters or others offering the security can adjust the price or offer more securities to reflect the higher-than-anticipated demand.

Understanding Oversubscribed IPOs

An oversubscribed security offering often occurs when the interest for an initial public offering (IPO) of securities exceeds the total number of shares issued by the underlying company. The degree of oversubscription is shown as a multiple, such as "ABC IPO oversubscribed two times." A two-times multiple means there is twice as much demand for shares as the scheduled issue.

Share prices are intentionally set at a level that will ideally sell all shares. The underwriters of an IPO generally do not want to be left eating stock. If there is more demand for an IPO than there is supply (creating a shortage), a higher price can be charged for the securities resulting in more capital raised for the issuer. However, oversubscribed IPO shares are often underpriced to some extent to allow for a post-IPO pop and robust trading to continue to generate excitement around the issue. Companies leave a bit of capital on the table, but may still please the internal stockholders by giving them a paper gain even if they are stuck in a lock-up period.

Example of Oversubscribed Securities

In early 2012, analysts indicated that the long-awaited Facebook IPO, seeking to raise about $10.6 billion by selling more than 337 million shares at $28 to $35 per share, could generate such significant interest from investors that it might lead to an oversubscribed IPO. As predicted, investor interest, leading up to the IPO on May 18, 2012, showed there was more demand for Facebook shares than the company was offering.

To take advantage of the oversubscribed IPO and fulfill investor demand, Facebook provided not only more shares (421 million versus 337 million) to investors, but also raised the price range to $34 to $38 per share. In effect, Facebook and its underwriters raised both the supply and price of shares to meet demand and diminish the securities oversubscription. As a result, Facebook raised more capital and carried a higher valuation.

Benefits and Costs of Oversubscribed Securities

When securities are oversubscribed, companies can offer more of the securities, raise the price of the security, or partake in some combination of the two to meet demand and raise more capital in the process. Companies almost always hold back a large portion of shares to allow for future capital needs and management incentives, so there is usually a good-sized reserve that can be added if an IPO is looking to be badly oversubscribed. More capital is good for a company, of course. Investors, however, have to pay higher prices and may get priced out of the issue if the price rises above their willingness to pay.