Written By
Paul Tracy
Updated November 4, 2020

What is Unsubscribed?

The term unsubscribed describes the portion of the shares in an IPO that are not sold prior to the IPO.

How Does Unsubscribed Work?

Let’s assume Company XYZ is going public. It plans to issue 10 million shares in an initial public offering. Its investment bank, Bank ABC, agrees to underwrite the IPO. Bank ABC creates a document detailing Company XYZ’s business model, financial forecasts and the terms of the offering, and it meets with potential investors to gauge their interest in purchasing the 10 million shares. After this process, Bank ABC agrees to sell 9 million shares for $25 per share. The remaining 1 million are unsubscribed, meaning they don't have a buyer.

Why Does Unsubscribed Matter?

IPOs often become unsubscribed because the price is too high. Sometimes, a back stop purchaser agrees to buy leftover shares from the underwriter of an equity or rights offering. A back stop purchaser is like insurance -- the purchaser guarantees in some form that a company (and its investment bank) will raise the money it intends to raise.

In our example, if for some reason Bank ABC can’t sell all the shares in the IPO (this is called the unsubscribed portion), the back stop purchaser agrees to buy those leftovers. The back stop purchaser, of course, obtains a fee for agreeing to be the back stop because it is taking on the risk of having to purchase (and they try to reissue) the Company XYZ securities.

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