Subscribed (Securities) - Explained
What is Subscribed in a Securities Issuance?
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Table of ContentsWhat is Subscribed in a Securities Issuance? Why is being Subscribed in a Securities Issuance Important? Subscribed Deals and Prospectus ReportsExample of SubscriptionAcademic Research on Subscribed Security Issuance
What is Subscribed in a Securities Issuance?
Subscribed is a word used when new securities are being issued. It refers to the state of newly issued securities wherein investors have shown interest in buying them before the official issue date. When investors subscribe to securities, it means they have agreed to purchase the securities even before they are officially issued. In some cases, the prices of securities are unknown before investors subscribe to them. The most common example is Initial Public Offering whose selling prices are not known until the first day of trade.
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Why is being Subscribed in a Securities Issuance Important?
When a company has new securities to be issued, having the appropriate subscription for the securities is vital. In a public offering, the investment bank or underwriter issuing the securities has the mandate to ensure that the needed number of investors subscribe for the securities. In most cases, before the official issue date of securities, investment banks already have investors with high net worth (HNI) who have agreed to or shown interest in the purchase of the new securities.
For HNIs, they can place an order for the new securities through broker-dealers or brokerage firms. When there is a proportionate subscription to an issue, it is called fully subscribed. However, there are instances where there will be less demand in an IPO, this means the demand for the issue is below the number of shares being issued by the issuing company, this is a situation called Undersubscribed or underbooking.
On the other hand, if the demand for securities in an IPO is more than the number of securities available for sale, it is oversubscribed. Oversubscribed can lead to a hike in the price of securities, since demand is more than supply. However, most issuing companies are not impressed when there is too much subscriptions or too few subscriptions. They often aim to have the right number of subscribers and a higher offering price. Here are some key points to note about subscribed;
- Subscribed describes a situation whereby an investor has shown interest or agreed to the purchase of securities in an IPO before the official issue date.
- An IPO can be fully subscribed, oversubscribed and Undersubscribed.
- Investment banks often target high net worth (HNI) investors, accredited investors and institutional investors to subscribe for new issues.
- Most investors read through the prospectus of the offering before they subscribe.
Subscribed Deals and Prospectus Reports
In an IPO, investors have the right to know about the new issue before they subscribe or otherwise. A document containing a detailed information about the new issue is the prospectus. The Securities and Exchange Commission requires that investment banks present the prospectus in the form of a legal document that investors can access before making the decision to subscribe to a new offering.
The major details contained in a prospectus are the name of the issuing company, the type of securities being issued, the number of securities available in the new offering, the underwriting fee, whether the offering is a public or private placement, background information about the issuing company and its management, among others. It is essential that investors pay rapt attention to the information supplied in a prospectus.
The primary document that is circulated about a new offering in an IPO is a preliminary prospectus. This is to give investors an idea about the new issue, details of the transaction, the type of transaction in particular, the precise number of shares in the new offering and few other information. After going through the preliminary prospectus, if an investor agrees to the purchase of the new issue before the official issue date, the final prospectus is then printed. This shows that the deal has been agreed upon by the parties.
Example of Subscription
It is important to emphasize that a new offering can be fully subscribed, oversubscribed and Undersubscribed. Using a fully subscribed offering, the illustration below would aid a better understanding of subscribed. Company XYZ has new issues to be offered, the number of shares in the issue is 250, having done a fair assessment, an underwriter sets $35 as the price of each share.
After the preliminary prospectus is released, investors agree to purchase all the 250 shares at $35 each. Since there are no shares left out no demand unattended to, it is a fully subscribed offering. The offering will be Undersubscribed, if only few investors agree to buy the shares, residual, of a higher price of set for the shares. Such as $45 per share. Also, oversubscribed can occur if the price is really cheap and there are more subscriptions than the number of shares available for sale.
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