Subscribed

What Is Subscribed?

Subscribed refers to newly issued securities that an investor has agreed to, or stated his or her intent to, buy prior to the official issue date. When investors subscribe, they expect to own the designated number of shares once the offering is complete.

For instance, institutional investors may subscribe to a company's initial public offering (IPO) before knowing the actual IPO price on the first day of trading, but so are guaranteed shares.

Understanding Subscribed

The goal of an investment bank in a public offering (such as an IPO or secondary offering) of securities is to have the right number of subscribed investors for the issue. Many accredited or high net worth (HNI) investors can view a subscription to a public offering and make orders to purchase soon-to-be issued shares from their brokerage firms. These options are generally not available to retail investors.

The investment bank handling a public offering tries to determine which offering price will result in an optimal number of share subscriptions; too many subscriptions will not impress the issuing company, as the company is likely to prefer a higher offering price. Conversely, too few subscriptions might result in the investment bank being unable to sell its entire inventory of the security issue, exposing it to significant losses.

Oversubscribed is the term for when the demand for an IPO's shares is greater than the number of shares issued. When a new security issue is oversubscribed, underwriters or others offering the security can adjust the price or offer more securities to reflect the higher-than-anticipated demand. When securities are oversubscribed, companies can offer more of the securities, raise the price of the security, or partake in some combination of the two to meet demand and raise more capital in the process.

Undersubscribed, on the other hand, is a situation in which the demand for an initial public offering of securities is less than the number of shares issued. This situation is also known as an "underbooking." Undersubscribed offerings are often a matter of overpricing the securities for sale

When the issue is subscribed at just the right amount, it is considered fully subscribed. Another expression sometimes used for fully subscribed is the slang term "pot is clean."

Subscribed Deals and Prospectus Reports

The prospectus for a new offering is a detailed document that potential investors will pore over prior to subscribing to a new issue. The prospectus is a formal legal document that the Securities and Exchange Commission requires. It provides an enormous amount of information about an investment offering for sale to the public, including basic details, such as the name of the company or mutual fund issuing stock, the amount and type of securities being sold, and the number of available shares (for a stock offering).

The prospectus also describes whether an offering is public or a private placement, what the underwriting fees are, and the names of the company’s principals. An overview of the company’s financial statements, the background of its management, a section wherein the management describes the company’s current state and future goals for growth (management discussion and analysis), and the risks section are all also important.

A preliminary prospectus is the first document that a security issuer will circulate; it includes many details of the business and transaction in question, and the final prospectus containing finalized background information (e.g. the exact number of shares/certificates issued and the precise offering price) will traditionally follow. The final prospectus is printed after the deal has been made effective.

When reading a prospectus, it’s important to pay attention to information that is unique to that company (not just the legalese that all public companies incorporate into their filings).

Example of Subscription

As an example of a fully subscribed offering, consider this. Company ABC is about to go up for public offering. There will be 100 shares available. The underwriter has done their due diligence and determined that the fair market price is $40 per share. They offer these shares up to investors at $40 each, and the investors agree to buy all 100 shares. The offering for ABC is now fully subscribed, as there are no remaining shares to sell.

If the underwriters had priced the shares at $45 per share to try and make a higher margin of profit, they may have only been able to sell half of the shares. This would have left the stock undersubscribed, with half of the stock remaining unpurchased and subject to being reoffered at a lower rate, for example $35 per share.

Additionally, if the underwriters had originally priced the shares at $35 per share to hedge their bets, and guaranteed that all shares sold since they were priced aggressively, they would have shorted the ABC company $500 in this transaction, or $5 per share. They would have also run the risk of creating a bidding situation where some of their potential investors would be priced out of ABC’s stock.