DEFINITION of 'Pot Is Clean'

Pot is clean is a slang phrase referring to a situation in which an underwriter has successfully sold to investors all of its available shares of an initial public offering (IPO). Also known in more formal terms as "fully subscribed."


When a company decides that it wants to go public, it will meet with a few or several investment banks and select a lead underwriter. This underwriter will put together a prospectus in conjunction with the firm and simultaneously reach out to institutional investors to market the IPO. During the process the investment bank and its client will gain a sense of the market appetite for the new shares and then try to set terms of the deal (pricing, number of shares offered) that will balance the needs of the company and the investors. Obviously, the company wants a high valuation out of the gate, but investors do not want to overpay.
Whether the IPO is a bought deal or executed on a best efforts basis, the goal of the underwriter is to sell all shares made available in the offering. If demand is strong for the IPO and the underwriter and its distribution syndicate place all the shares, then they can say that the pot is clean. The pot of shares may be emptied quickly, which may be a sign that the underwriter underpriced the shares. However, the underwriter, if it does its job well, will have mitigated the risk of leaving money on the table for its client by gauging demand leading up to IPO pricing date. If demand is greater than first expected, the underwriter can move up the IPO price. An indicative range of, say, $20-$22 per share early in the process can be increased to $24-$26 if the market shows solid interest. Let's say that the final price is $26 per share and the pot gets cleaned by friendly hands. Furthermore, upon launch into the market, the share price is firm or receives a modest bump up. That type of scenario would be ideal for both underwriter and its client.
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