What Is Unsubscribed?
Stock shares from an initial public offering (IPO) that are not purchased, or subscribed, ahead of the official release date, are labeled unsubscribed.
This means that there has been little or no interest in the security in advance of the IPO. It may not even have been offered by brokerages.
- An unsubscribed IPO has gained little interest from big investors in advance of its release on the exchanges.
- The price may have been set too high.
- The IPO may go forward, after which the market will set the price.
If and when the IPO goes forward, investors who want to own unsubscribed stock can purchase them through the secondary market, as they would any other stock.
Unsubscribed Securities In Depth
A subscription to an initial public offering is an order to purchase the shares from a brokerage firm at a set price once they are issued. Subscribers in this case are buying newly-issued shares directly from the company.
From then on, those shares rise or fall according to the whims of the open market and can be sold or bought only among investors, primarily through the public stock exchanges.
If IPO shares are under-subscribed, the issuing company may recall the shares and reimburse the few buyers who expressed interest. As an alternative, some investment banks have a backstop buyer or buyers ready and willing to step in to purchase unsubscribed shares.
Preparing for an IPO
A company’s IPO is typically underwritten by an investment bank. The investment bank tries to determine the offering price that will result in an optimal number of subscriptions. Too high an offering price is likely to result in the shares being unsubscribed, and the size of the unsubscribed portion of the IPO can affect the prices of all the shares.
If a portion of an IPO is unsubscribed, the issuing company may not be able to raise the amount of money it had sought. The issuer may require an underwriter to buy the unsubscribed portion.
Example of Unsubscribed Shares
Say that Company X is about to go public. It wants to issue an IPO of eight million shares. Its investment bank underwrites the IPO, prepares documents detailing the company’s business model and financial outlook, and then shops this information to potential buyers to see if they will subscribe to the offering, or agree to buy shares of it prior to its release. Most of these potential buyers are institutional investors or other large-scale buyers.
Once the underwriting bank has gauged the level of interest, it will decide how many shares to sell and at what price.
When the Price Is Wrong
In this example, let’s say that the underwriting bank finds buyers for seven million of Company X’s eight million shares, and it agrees to sell those shares for $20 apiece. One million of the shares remain unsubscribed. Company X may not earn as much from its IPO as it had hoped to earn.
To an individual investor, the lack of interest may be taken as a sign that this IPO is going to be a flop. At the very least, the initial price was set too high.