An offering can attract more orders than available shares and still be priced poorly. Your job is to determine which demand will survive pricing and support distribution.
You begin by educating the internal sales force through an internal sales memo, a briefing that explains the issuer, offering terms, valuation, risks, and likely investor objections. Start by identifying current market and sector trends; they tell you which sales points of each transaction, such as recurring revenue or reduced debt, to stress. A favorable sector narrative cannot erase issuer-specific weaknesses.
Build the list of prospective investors by reviewing current shareholders of the issuer and shareholders of comparable companies. Match their investment mandates, sector exposure, available capital, and typical position sizes. Existing ownership suggests familiarity, but concentration limits may prevent additional purchases.
Ownership records your firm holds as paying agent, transfer agent, or trustee are generally off limits for this search. Those records reach the firm only because it services the issuer's securities, and using them for the firm's own selling would turn that service role into a...
Common mistakes
- Applying 15% to 2.3 million total allocations gives 345,000 option shares. The correct base is 2 million, producing 300,000.
- Using Rule 5131's 25% spinning exemption for Rule 5130 eligibility overlooks the latter's separate 10% account limit.
- Treating a $20 fixed-price offering as permitting a $1 service-fee rebate ignores Rule 5141's indirect-discount restriction.
Bottom line
- IOIs are nonbinding and must be assessed at the proposed offering price.
- Rule 5130's account exemption uses 10%; Rule 5131's separate spinning exemption uses 25%.
- Gross spread comprises management fees, underwriting fees, and selling concessions.
- The greenshoe cap is 15% of base securities, excluding option shares.
Exam shortcut
For economics questions, identify whose shares are sold, whether the option was exercised, and whether the question asks for spread, selling credit, or trading gain. Calculate the per-share spread first. Then apply the relevant share count and fee percentage; never award the entire spread to a firm receiving only selling credit. For allocation questions, test customer eligibility before commercial attractiveness.
The full lesson (about 4,494 words, 30 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- B17
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