What Is Unsubscribed?
The term unsubscribed refers to any shares that are part of an initial public offering (IPO) that are not purchased ahead of the official release date. This means there is little to no interest in the security in advance of the company's IPO. Put simply, being unsubscribed means that demand for shares is low. Analysts and investors may safely assume that IPOs that become subscribed are overpriced. Being unsubscribed may prevent companies from raising the capital they need to meet their goals.
- Unsubscribed refers to a portion of shares in an IPO that remain unsold.
- Demand for shares is generally lower than supply if an IPO is unsubscribed.
- Some of the reasons for being unsubscribed include an overpriced IPO, problems with the company, and overall market conditions.
- Being unsubscribed means that companies won't be able to raise the money they need to keep their companies operational or to fund their growth plans.
- Companies with unsubscribed shares may consider taking on more debt or selling their businesses as alternatives to an IPO.
Private companies go through the IPO process when they want to go public. Doing so allows them to go to the market and sell shares in order to raise money for their day-to-day operations and growth plans. An IPO subscription refers to an order placed by an investor—usually an institutional investor—for newly-issued securities before they are officially issued. These shares are issued directly by the company rather than through a broker on the secondary market.
Unsubscribed shares refer to the portion of any stock that remains unsold before the IPO. This means that demand for company stock is low and is outweighed by the overall supply. As noted above, it is often a sign that the company and its underwriters have priced the IPO share price too high.
Companies that go through the IPO process generally have a target in mind as to how much capital they intend to raise from the offering. Being unsubscribed means that they won't be able to raise the capital they initially hoped. As such, it may lead to a disruption in their day-to-day operations or growth plans. To an individual investor or analyst, the lack of interest may be taken as a sign that an IPO is going to be a flop.
Unsubscribed shares may rise or fall according to the whims of the open market. They can then be purchased or sold only among investors on the secondary market, primarily through the public stock exchanges or by using a broker.
In unsubscribed IPOs, which may also be called undersubscribed, the issuing company may recall the shares and reimburse the few buyers who expressed interest. This is in contrast to an oversubscribed IPO, in which investor demand far outweighs the supply of shares available. The underwriters responsible for an oversubscribed offering can adjust the price and/or offer more shares to meet the demand.
Preparing for an IPO
A company’s IPO is typically underwritten by an investment bank. This institution tries to determine the offering price that will result in an optimal number of subscriptions. Setting an offering price that's too high will likely result in the shares being unsubscribed. As such, the size of the unsubscribed portion of the IPO can affect the overall price of an entire lot of shares. The issuing company in the IPO may require an underwriter to buy the unsubscribed portion.
Reasons for Unsubscribed Shares
As mentioned earlier, the primary reason is often due to the fact that the IPO share price is set far too high. But there are other reasons why an IPO may be unsubscribed. Some of these include:
- Problems with the company (financial irregularities, corporate management issues, etc.)
- A failure to generate interest with investors
- A lack of marketing and promotion, which can lead to very little knowledge of the IPO
- Overall market conditions
- An ill-timed IPO (especially during times of financial and economic stress)
Other Funding Options
Successful IPOs (subscribed and oversubscribed ones) are those that raise a lot of capital. This helps keep the business afloat while allowing it to fund its operations and growth strategies. But what happens when an IPO becomes unsubscribed and fails?
Companies may have to find other ways to raise money. Some of these options include:
- Debt financing
- Raising money through government grants
- Opening up additional financing rounds for existing investors
- Selling the company
Example of Unsubscribed
Here's a hypothetical example to show how unsubscribed shares work. Let's say that Company X is about to go public and 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 gauges the level of interest, it will decide how many shares to sell and at what price. But let’s assume 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.
What Is the Purpose of an Initial Public Offering?
An initial public offering allows companies to go to the market to raise money by issuing shares to investors. By selling shares, the company agrees to cede ownership to shareholders in exchange for the capital. The money raised by selling shares allows the business to remain operating and fund its growth plans. The company may also be able to delay having to assume (more) debt to keep itself afloat.
What Is an Oversubscribed IPO?
An oversubscribed IPO is the opposite of an undersubscribed one. This means that the IPO has a lot of interest from investors. As such, demand far outweighs the available supply of shares. Underwriters can make changes to the offer price or they can increase the number of shares in order to meet demand.
Who Buys Unsubscribed Shares?
When an IPO is unsubscribed, there are shares that remain unsold. In this case, the issuing company may require the underwriting bank(s) to purchase any or all of the portion of unsubscribed shares.
How Do IPO Underwriters Get Paid?
The issuing company selects an underwriting bank that works for its interests. Other institutions may be required, depending on the size and nature of the IPO. The original underwriter becomes the lead and forms a syndicate.
Underwriters are generally guaranteed a fee for their services. The lead receives a portion of the gross spread, which is fixed as a percentage of the IPO proceeds. The remaining portion is split between the remaining underwriters. The company may also agree to cover other costs, including out-of-pocket expenses incurred by the underwriter(s) during the process.