Unsubscribed: What It Means, How It Works

Cierra Murry is an expert in banking, credit cards, investing, loans, mortgages, and real estate. She is a banking consultant, loan signing agent, and arbitrator with over 15 years of experience in financial analysis, underwriting, loan documentation, loan review, banking compliance, and credit risk management.

What Is Unsubscribed?

The term unsubscribed refers to shares in 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 before the company’s IPO.

Being unsubscribed means that demand for shares is low. Analysts and investors may assume that subscribed IPOs are overpriced. Being unsubscribed may prevent companies from raising the capital they need.

Key Takeaways

• Unsubscribed refers to unsold shares in an IPO.
• Demand for shares is generally lower than supply in unsubscribed IPOs.
• Reasons for being unsubscribed include an overpriced IPO, problems with the company, and market conditions.
• Being unsubscribed means companies won’t be able to raise the money they need.
• Companies with unsubscribed shares may consider taking on more debt or selling their businesses.

Understanding Unsubscribed

Private companies go public through the IPO process to raise money. An IPO subscription refers to an order placed by an investor for newly-issued securities before they are officially issued. Unsubscribed shares refer to unsold stock before the IPO. This means demand for company stock is low and outweighed by supply. It may be a sign that the IPO share price is too high.

Being unsubscribed means companies won’t be able to raise the capital they initially hoped for. It may disrupt their operations or growth plans. Lack of interest may indicate an IPO will fail.

Unsubscribed shares can be purchased or sold among investors on the secondary market through stock exchanges or brokers.

In unsubscribed IPOs, the issuing company may recall and reimburse shares to buyers who expressed interest. This is in contrast to an oversubscribed IPO, in which demand exceeds supply.

Preparing for an IPO

A company’s IPO is typically underwritten by an investment bank. The bank determines the offering price that will result in optimal subscriptions. Setting a too-high offering price may result in unsubscribed shares. The size of the unsubscribed portion can affect the overall price of shares. The issuing company may require underwriters to buy the unsubscribed portion.

Reasons for Unsubscribed Shares

The primary reason is often an overpriced IPO share price. Other reasons include problems with the company, a failure to generate investor interest, a lack of marketing and promotion, and overall market conditions.

Other Funding Options

Unsubscribed IPOs require alternative ways of raising money. Options include debt financing, government grants, additional financing rounds, or selling the company.

Example of Unsubscribed

Here’s a hypothetical example. Company X wants to issue an IPO of eight million shares. The underwriting bank finds buyers for seven million shares at $20 apiece. One million shares remain unsubscribed. Company X may not earn as much from the IPO as expected.

What Is the Purpose of an Initial Public Offering?

An IPO allows companies to raise money by issuing shares to investors. Selling shares helps fund operations and growth plans, and may avoid taking on more debt.

What Is an Oversubscribed IPO?

An oversubscribed IPO has a lot of investor interest. Demand exceeds available shares. Underwriters can adjust the offer price or increase the number of shares.

Who Buys Unsubscribed Shares?

When an IPO is unsubscribed, shares remain unsold. The issuing company may require underwriters to purchase unsubscribed shares.

How Do IPO Underwriters Get Paid?

The issuing company selects an underwriting bank. The original underwriter becomes the lead and forms a syndicate. Underwriters are guaranteed a fee, with the lead receiving a portion of the gross spread. The remaining portion is split between underwriters. The company may also cover other costs incurred by underwriters.