Why would someone show interest (IOI)?
An indication of interest is an underwriting statement that shows a possible but not binding desire to buy a security that is still being registered and waiting for approval by the Securities and Exchange Commission (SEC). A sample prospectus must be given to the investor by their broker. But when it comes to mergers and acquisitions (M&A), IOIs are used differently, even though they have the same goal.
How to Fill Out an Indication of Interest (IOI) Form
A sign of interest is usually given before an initial public offering (IPO) in securities and investments. It shows a possible but not a required desire to buy a security that is still waiting for regulatory approval since all U.S. securities must be cleared by the SEC.
It is against the law to sell a bond that is still registered, so the IOI has no force. A preliminary prospectus must be given to the client by their stockbroker. The IOI is still open-ended and does not mean you must buy anything.
Expressions of trade interest that include one or more of the following make up an IOI:
- The name of the security
- No matter if the person is buying or selling
- How many shares, how much space, and
- The price to buy or sell something
Firms and broker-dealers can talk to each other online. They can also inform the market about their own or clients’ trading interests through IOIs, which can be done on their systems or trade platforms just for that purpose.
Signs of interest in IPOs are generally taken on a first-come, first-served basis. Putting in an expression of interest does not ensure you can buy into an IPO because the demand for securities may be higher than the available supply to be distributed.
A sign of interest is different from a legal duty to buy. But it does give the owner a general idea of how well the business is doing with money. This will help you decide whether to buy in or not.
There are IOIs in mergers and acquisitions (M&A)
An expression of interest in mergers and acquisitions is like an IOI for an IPO in terms of its purpose. But some other parts play a role. This is, again, an IOI, which means it is not a legally binding deal. Usually, a buyer writes this kind of letter to a seller.
The goal is to show that you are interested in buying a business. An IOI should, among other things, advise on how much the target company should be worth, and it should also spell out the general terms for closing a deal. Some of the most common parts of an IOI for M&A deals are, but are not limited to:
The price range is pretty close. A number range, like $10 million to $15 million, can be used to show this. It can also be written as a multiple of EBITDA, such as 3 to 5x EBITDA, depending on whether or not a buyer has access to funds and other sources of support.
Plan for keeping management on board and what the stock owner(s) will do after the deal.
Items needed for due diligence and a rough idea of how long it will take.
Some possible parts of the deal structure that could be suggested are asset vs. equity, leveraged transaction, cash vs. equity, etc.
How long do you have to finish the deal?
An IOI is a statement of interest, while a LOI is a letter of intent.
An indication of interest (IOI) is a casual note from an investor that they want to buy or get a commodity. A letter of intent (LOI) is more binding, but this isn’t. There are value ranges and less detailed transaction details in the indication of interest. The negotiations start with the IOI, which comes before the LOI.1
When the talks are over, the official LOI is made, which spells out all the deal’s specifics. Just like the IOI, it’s not a fully binding deal. It instead says that the investor is committed to buying security, which is the basis for the written contract.
If the seller agrees to the terms of the LOI, the deal can be made after it has been reviewed. As soon as the deal is signed, the seller agrees to work only with the buyer and can’t talk to other buyers for a certain time.2
Since IOIs and LOIs are not legally binding, either party to a deal can end talks.
An example of an Indication of Interest
The CEO of Blackbaud, Marc Chardon, sent an updated IOI to Richard LaBarbera, the president and CEO of Kintera, in May 2008. Chardon’s offer showed that he wanted to buy his company’s shares. 3 In the letter, he asked for an all-cash offer and an exclusive deal with a set end date.
In the IOI, there were details like:
- The price to buy each share was $1.12
- Its promise of an all-cash deal
- Approvals and conditions for closing
- A plan to keep managers
- A likely closing date of July 1, 2008
Chardon’s plan to keep managers suggested that Kintera’s CEO, other executives, and top managers get job contracts. The IOI also laid out the confidentiality rules.
It said that Kintera couldn’t make a deal with a third party about an acquisition until the purchase agreement was signed or until the buyer ended negotiations.
It also said that Kintera couldn’t talk to or negotiate with a third party, give information about Kintera to a third party, ask for proposals, or let company representatives do any of these things.
At the end of the notice, it stated the binding terms. These included the date the notice ended (May 21, 2008) and the IOI, which was a non-binding step toward an agreement.
What is an indication of interest that can be acted upon?
An IOI that gives detailed information about the purchase is an actionable indication of interest. 4 Some of these elements are security symbols. This price is equal to or higher than the National Best Bid and Offer (NBBO), the size, and so on.
Who Can Get Rid of an Expression of Interest?
The buyer who sends the letter can cancel the expression of interest. It will be immediately canceled if it is not confirmed within the time limit.
What is an attractive natural sign?
When IOI comes from a customer instead of a company, it’s a typical sign of interest. FINRA defines it as “either to customer interest a firm represents on an agency basis or to proprietary interest established to facilitate a customer order or as part of an execution of a customer order on a riskless principal basis.”
Conclusion
Signs of interest are deals that don’t have to be kept but are still binding to buy a company or security when they become available.
These stocks are talked about during the IPO registration process.
They were set up by stockbrokers so that trades could be made.
No matter how nonbinding they are, IOIs are only severe questions.
When you show interest in an IOI, it doesn’t mean you’ll be able to buy the security when it goes public.
