What is Oversubscription?

Oversubscription is a situation where an Initial Public Offer (IPO) triggers more buyers than there are shares available. In other words, it is a condition where demand exceeds supply of shares. An oversubscription is a convenient indicator for underwriters to perform one of the following adjustments to their initial offer in order to satisfy the increasing demand:

1. Increase the per-unit price of the securities on offer.
2. Offer additional securities.

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How does Oversubscription Work?

A security offering is said to be oversubscribed when the demand for securities on offer via an initial public offering (IPO) exceeds the actual number of available securities. This is in sharp contrast to undersubscription, where the number of shares on offer exceeds the number of shares demanded by investors, thus creating a surplus. 

Oversubscription is measured in terms of multiples of the available number of shares of bonds. For example, if company X issues an IPO of 20,000 shares, triggering a demand for 40,000 shares, then the X IPO can be said to be oversubscribed two times. Typically, underwriters set prices of shares or bonds on offer through an IPO in such a way as to preempt either a shortage or a surplus of offered securities. In circumstances where there arises a shortage of securities (by virtue of oversubscription), underwriters are free to increase per-unit prices of the securities on offer. This also helps the company raise additional capital for its future endeavors. 

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An instance of Oversubscription of Securities

Let us consider the example of one of the most eagerly-awaited initial public offerings of 2019 - the Lyft IPO. Taxi aggregator and Uber rival Lyft announced its foray into the public domain via an initial public offering that sought a $23 billion valuation. The ride hailing startup had initially targeted an indicative IPO price range of $62 to $68 per share and hoped to price the IPO by March 28, 2019. Lyfts IPO was oversubscribed a phenomenal 20 times. 

On March 28, 2019, the startup announced an offering of 32.5 million shares, each priced at $72, which was the upper limit of its targeted $70-$72 price range. Lyft managed to raise $2.34 billion from the IPO. The companys debut in the market on March 29, 2019 saw its share prices rise by as much as 23 percent. Lyft stock opened at $87.24, lost almost 9% of its gains, and still managed to close at $78.29. The companys market capitalization was pegged at around $22.2 billion. 

Advantages of Oversubscribed Securities and Expenses Involved

An oversubscription of securities provides the company with the option to either offer additional securities for public purchase or raise its per-unit price. The company can also formulate a combination of the two approaches to meet investor demand and accumulate more capital resources. However, there exists an upper ceiling to security price increases, beyond which investors may be unwilling to pay.