What Is Unsubscribed?

The term unsubscribed refers to any shares that are part of 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 in advance of the company's IPO.

Put simply, being unsubscribed means that demand for shares is low. Analysts and investors may safely assume that IPOs that become subscribed are overpriced. Being unsubscribed may prevent companies from raising the capital they need to meet their goals.

Understanding Unsubscribed

Private companies go through the IPO process when they want to go public. Doing so allows them to go to the market and sell shares in order to raise money for their day-to-day operations and growth plans. An IPO subscription refers to an order placed by an investor—usually an institutional investor—for newly-issued securities before they are officially issued. These shares are issued directly by the company rather than through a broker on the secondary market.

Unsubscribed shares refer to the portion of any stock that remains unsold before the IPO. This means that demand for company stock is low and is outweighed by the overall supply. As noted above, it is often a sign that the company and its underwriters have priced the IPO share price too high.

Companies that go through the IPO process generally have a target in mind as to how much capital they intend to raise from the offering. Being unsubscribed means that they won't be able to raise the capital they initially hoped. As such, it may lead to a disruption in their day-to-day operations or growth plans. To an individual investor or analyst, the lack of interest may be taken as a sign that an IPO is going to be a flop.

Unsubscribed shares may rise or fall according to the whims of the open market. They can then be purchased or sold only among investors on the secondary market, primarily through the public stock exchanges or by using a broker.

Preparing for an IPO

A company’s IPO is typically underwritten by an investment bank. This institution tries to determine the offering price that will result in an optimal number of subscriptions. Setting an offering price that's too high will likely result in the shares being unsubscribed. As such, the size of the unsubscribed portion of the IPO can affect the overall price of an entire lot of shares. The issuing company in the IPO may require an underwriter to buy the unsubscribed portion.

Reasons for Unsubscribed Shares

• Problems with the company (financial irregularities, corporate management issues, etc.)
• A failure to generate interest with investors
• A lack of marketing and promotion, which can lead to very little knowledge of the IPO
• Overall market conditions
• An ill-timed IPO (especially during times of financial and economic stress)

Other Funding Options

• Debt financing
• Raising money through government grants
• Opening up additional financing rounds for existing investors
• Selling the company
  

Example of Unsubscribed

Here's a hypothetical example to show how unsubscribed shares work. Let's say that Company X is about to go public and wants to issue an IPO of eight million shares. Its investment bank underwrites the IPO, prepares documents detailing the company’s business model and financial outlook, and then shops this information to potential buyers to see if they will subscribe to the offering, or agree to buy shares of it prior to its release. Most of these potential buyers are institutional investors or other large-scale buyers.

Once the underwriting bank gauges the level of interest, it will decide how many shares to sell and at what price. But let’s assume that the underwriting bank finds buyers for seven million of Company X’s eight million shares, and it agrees to sell those shares for $20 apiece. One million of the shares remain unsubscribed. Company X may not earn as much from its IPO as it had hoped to earn.