The registration statement is effective and the price talk is set. Now the syndicate must educate its own salespeople, gather demand, pick a price, allocate shares, and support the aftermarket, all without tripping the wires Regulation M strings around a live distribution.
Before any client hears the pitch, the deal team writes an internal sales memo. It distills the prospectus into talking points: the investment thesis, valuation range, use of proceeds, and key risks. It is for the firm's own salespeople, not the public, and it must stay consistent with the prospectus.
With the memo in hand, the syndicate stages the road show: a series of investor meetings and group presentations where management and bankers market the offering. The road show generates the demand that fills the book.
KEY: The internal sales memo educates employees; the prospectus and road show reach investors. Mixing the two, or letting the memo say more than the prospectus, creates a free-writing problem.
As investors respond, the syndicate collects indications of interest (IOIs): nonbinding statements of how many shares an investor wants and, often, at what price.
Common mistakes
- Calling the greenshoe more than 15%. The over-allotment option is capped at 15% of the base deal, not 20% or 25%.
- Reversing the greenshoe decision. When the stock trades above the offering price, underwriters exercise the option; when it trades below, they buy in the open market to cover and stabilize. Candidates flip these.
- Stabilizing above the offering price. A legal stabilizing bid is at or below both the offering price and the highest independent bid. A bid placed to lift the stock is manipulation, not Rule 104 stabilization.
Bottom line
- The internal sales memo educates the sales force before the road show; indications of interest (IOIs) build the book
- The greenshoe (over-allotment) option lets underwriters sell up to 15% extra shares, then cover by exercising it (price rose) or buying in the open market (price fell)
- FINRA Rule 5130 bars members and restricted persons from buying new-issue equity IPOs; Rule 5131 bans spinning and abusive allocation; Rule 5141 governs fixed-price offerings; Rule 6130 governs offering transparency to the public reporting facility
- Reg M Rule 101 restricted period is 1 business day (ADTV at least $100,000 and public float at least $25 million) or 5 business days otherwise; actively traded securities (ADTV at least $1 million and float at least $150 million)...
Exam shortcut
Greenshoe direction follows price: above issue price, exercise the option; below issue price, buy in the market and stabilize. The option caps at 15%. Reg M restricted period ladder: actively traded (ADTV at least $1M and float at least $150M) means none; ADTV at least $100K and float at least $25M means 1 day; everything else means 5 days. Both conditions of a tier must hold.
The full lesson (about 2,866 words, 19 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B17
- B18
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