Indication of Interest (IOI)

What Is an Indication of Interest (IOI)?

An indication of interest (IOI) is a underwriting articulation showing a conditional, non-binding interest in buying a security that is at present in registration — anticipating endorsement by the Securities and Exchange Commission (SEC). The investor's broker is required to give the investor a preliminary prospectus. Notwithstanding, IOIs in the mergers and acquisitions world have comparable intent yet are done any other way.

How an Indication of Interest (IOI) Works

In the securities and investing world, an indication of interest (IOI) is typically communicated in advance of a IPO (initial public offering). It exhibits a conditional, non-binding interest in buying a security that is as of now anticipating regulatory endorsement (securities in the U.S. must be cleared by the SEC). The IOI is non-binding since it against the law illegal to sell a security while still in the registration cycle. The investor's stockbroker is required to furnish the investor with a preliminary prospectus. The IOI stays unassuming and isn't a commitment to buy.

An IOI involves articulations of trading interest that contain at least one of the accompanying components: the security name, whether the participant is buying or selling, the number of shares, capacity, or potentially price of the purchase or sale. Firms and broker-dealers can electronically convey or promote proprietary or client trading interest as IOIs to the marketplace, either through their own systems or through dedicated trading platforms.

Indications of interest for IPOs are usually accepted on a first-come, first-served basis. Since the demand for securities might surpass the supply available to circulate, putting an indication of interest doesn't guarantee you'll have the option to buy into an IPO.

An IOI is certainly not a legal obligation to purchase, yet it will provide the investor with an overall thought of how the company is doing financially. This will assist the decision with handling of buying in or not.

Special Considerations

In the world of mergers and acquisitions, an indication of interest is comparable in intent to an IOI for an initial public offering, however with various parts. By and by, it is a non-binding agreement, however this sort of IOI usually comes as a prepared letter written by a buyer and addressed to the seller. The purpose is to convey a genuine interest in purchasing a company. In addition to other things, an IOI ought to give guidance on a target valuation for the acquisition target company, and it ought to likewise frame the general conditions for finishing a deal. Components of a regular IOI for mergers and acquisitions frequently incorporate, yet are not limited to:

• Estimated price range; can be communicated in a dollar value range (e.g., $10 million to 15 million) or stated as a various of EBITDA (e.g., 3 to 5x EBITDA). Buyer's overall availability of funds and wellsprings of financing.
• Management retention plan and the job of the equity owner(s) post-transaction.
• Essential due diligence things and a best guess of the due diligence course of events.
• Likely proposed components of the transaction structure (asset versus equity, leveraged transaction, cash versus equity, and so forth.).
• Time span to close the transaction.

Indication of Interest (IOI) versus Letter of Intent (LOI)

An indication of interest (IOI) is an informal notice of an investor's interest in purchasing or gaining an asset. It is non-binding and less definitive than a letter of intent (LOI). The indication of interest incorporates value ranges and less specific subtleties of the transaction. The IOI, preceding the LOI, starts the negotiation interaction.

Toward the finish of negotiations, the formal Letter of Intent (LOI) is made, characterizing the specific subtleties of the transaction. Like the IOI, it's anything but a legally binding agreement; rather, it communicates the investor's commitment to purchase a security and fills in as the foundation for the formal contract.

Upon survey, in the event that the seller acknowledges the terms of the LOI, an agreement can be made. Upon execution, the seller enters an exclusive agreement with the buyer, restricting them from drawing in with different buyers for a period.

Either party to a transaction can end negotiations since IOIs and LOIs are non-binding.

Illustration of an Indication of Interest

In May 2008, Blackbaud's CEO Marc Chardon presented a modified IOI to Richard LaBarbera, President and CEO of Kintera, Inc., communicating interest in securing 100% of his company. In the notice, he requested a period bound exclusive deal in exchange for a higher all-cash offer.

Subtleties remembered for the IOI incorporated the purchase price of $1.12 per share, its commitment to an all-cash offer, endorsements and closing conditions, a management retention plan, and an estimated closing date of July 1, 2008. In its management retention plan, it recommended that Kintera's CEO and a few executives and senior managers would receive employment agreements.

Moreover, the IOI frames the eliteness conditions. It states that until the purchase agreement is executed or when the purchaser ends negotiations, Kintera may not go into an agreement with an outsider in regards to an acquisition, examine or haggle with an outsider, give information about Kintera to an outsider, request proposition, or allow delegates of the company to take part in any of these disallowed activities.

The finish of the notice listed the binding provisions, including the notice's termination date (May 21, 2008) and statements about the IOI being a non-binding forerunner to an agreement.

The Bottom Line

An indication of interest (IOI) is a short letter or notice that communicates a buyer's interest in buying a security in registration or a company's interest in obtaining another company. For investments, the IOI goes before the IPO, and in finance, it goes before the letter of intent (LOI). In spite of the fact that it's anything but a formal agreement, it conveys weight as it imparts the serious interest of the buyer.

Features

• Indications of interest (IOIs) are nonbinding agreements to get a company or buy a security once available.
• Communicating interest in an IOI gives no guarantee of the security once it arrives at the IPO.
• Even however these are nonbinding, IOIs comprise serious requests as it were.
• For investments, stockbrokers put the IOI in place.
• These securities are communicated during IPO registration.

FAQ

Who Can Cancel an Indication of Interest?

The buyer presenting the notice can cancel the indication of interest (IOI). In the event that left unconfirmed past the confirmation period, it will cancel automatically.

What Is an Actionable Indication of Interest?

An actionable indication of interest is an IOI that gives specific insights regarding the purchase. Such subtleties incorporate the security's symbol, a price comparable to or surpassing the National Best Bid and Offer (NBBO), size, and so on.

What Is a Natural Indication of Interest?

A natural indication of interest happens when IOI begins with the customer, as opposed to a firm. FINRA further characterizes it as alluding "either to customer interest a firm addresses on an agency basis or to proprietary interest that was laid out to work with a customer order or as part of an execution of a customer order on a riskless principal basis."