So you’ve just invested in an initial public offering (IPO). That’s great. But now you’re wondering, when do I get the shares I paid for? How long would it take after the offer closes to receive my shares?
This is where IPO allocations come in.
Applying for 10,000 shares does not automatically mean you’ll receive 10,000 shares. Your final allocation depends on factors such as the number of shares available, the number of valid applications received, the structure of the offer, and the basis of allotment set out in the relevant offer documents.
If an IPO is oversubscribed, the process can involve mechanisms such as minimum subscriptions, pro-rata allocation, scaling, balloting, or partial allocation. Investor categories can also matter where an offer has separate portions or rules for different classes of investors.
So, if you’re applying for an IPO, it helps to understand what happens after you click “submit.”
Let’s get into it.
What is IPO allocation?
First, let’s clear up two terms that are easy to mix up: subscription and allocation.
Your subscription is the number of shares you apply to buy.
Your allocation, or allotment, is the number of shares you are actually given after the offer closes and the allotment process is completed.
For example, imagine you apply for 5,000 shares in an IPO. If you get all 5,000, you have received a full allocation. A partial allocation is whenyou receive 2,000 shares. You have no allocation if you don’t get any shares from the offer.
The difference matters because the number of shares you request is not necessarily the number you eventually own.
The Securities and Exchange Commission (SEC) has a formal process for clearing a basis of allotment. Its checklist includes a summary of applications, commentary on allotment, range analysis of subscribers, large applications, rejected applications, and, where applicable, confirmation of High Net Worth Investor (HNI) status.
That gives us a useful starting point for understanding IPO allocations in Nigeria. The final allocation is determined after applications have been reviewed and the available shares have been distributed in accordance with the applicable rules.
So, what happens after an IPO closes?
Once the offer period ends, the allocation process begins, which includes the following:
1. Applications are collected:
Investors submit applications through the approved subscription channels during the offer period. Each application indicates how many shares the investor wants and includes the required investor and payment information.
2. Review of applications:
Next, the applications are compiled and checked. This includes identifying valid applications, rejected applications, and other information needed to determine the basis of allotment.
3. The level of subscription is determined:
The issuer and relevant intermediaries then know how much demand the offer received. There are three broad possibilities:
- Fully subscribed: The number of shares investors apply for is broadly in line with the number available.
- Oversubscribed: Investors apply for more shares than are available.
- Undersubscribed: Investors apply for fewer shares than are available.
The third situation is easier to deal with because there are enough shares to satisfy valid applications, subject to the terms of the offer.
4. The basis of allotment is determined:
The basis of allotment sets out how the available shares will be distributed among applicants.
This is why there is no one universal formula that can be used to calculate every investor’s allocation. The applicable offer documents and regulatory requirements determine how a particular offer is handled.
How are IPO allocations in Nigeria determined?
There are several concepts investors should understand when looking at an IPO’s allotment process. They include:
1. Minimum subscription
An IPO may specify the minimum number of shares an investor can apply for.
For example, the Dangote Refinery IPO has a minimum subscription of 10 shares, priced at ₦525 per share, meaning an eligible investor can start with ₦5,250. Applications can then be made in multiples of 10 shares.
The minimum subscription is particularly relevant when an offer is oversubscribed because the allotment methodology may take the minimum subscription amount into account when distributing available shares.
However, the minimum subscription is the minimum you can apply for, not necessarily the number of shares you are guaranteed to receive.
2. Pro-rata allocation
Pro-rata allocation means distributing shares in proportion to the size of eligible applications, subject to the specific rules of the offer.
Here’s a simplified example.
Suppose an IPO has 100,000 shares available, but investors collectively apply for 200,000 shares. This means there aren’t enough shares to give everyone their full request.
If a proportional allocation of the remaining shares is used, an investor who applied for more shares may receive a larger allocation than someone who applied for fewer.
But this doesn’t necessarily mean every applicant simply receives 50% of their application. The actual basis of allotment may involve minimum subscriptions, investor categories, or other mechanisms before or alongside proportional allocation.
3. Scaling
Scaling is another concept that can appear in an allotment process. It involves adjusting applications or allocations when demand exceeds the number of securities available.
For instance, an investor applies for 20,000 shares, but the available shares and the applicable allocation methodology mean the investor cannot receive the full 20,000. The application may be scaled down to arrive at the number of shares that can actually be allocated.
Scaling should not be confused with a guarantee that everyone receives the same percentage. The exact method depends on the offer documents.
4. Balloting
Balloting is another possible mechanism for resolving allocation when demand exceeds the available shares.
In a ballot-based process, eligible applicants may be selected through a defined random allocation process, depending on the terms of the particular offer.
Balloting is not something investors should assume happens automatically whenever an IPO is oversubscribed. Whether it is used and how it works depends on the applicable offer terms and regulatory framework.
So, if you see the word “ballot” in relation to an IPO, check the prospectus or basis of allotment to understand how shares for that particular IPO will be allocated.
5. Investor categories
Not every applicant in an IPO necessarily falls into exactly the same category.
Depending on the structure of an offer, there may be different investor categories or portions allocated to groups such as retail investors, high-net-worth investors, and qualified institutional investors.
The SEC’s allotment process requires information, including the range analysis of subscribers, applications for 50,000 units or more, applications representing 5% or more of the securities on offer, and confirmation of HNI status where applicable.
Why does this matter? Because an IPO can have specific rules about how securities are distributed between different investor categories.
For that reason, you shouldn’t assume that the allocation experience of one category will necessarily be identical to another.
The prospectus is the place to check which categories apply to a particular IPO and whether any portion of the offer has been reserved or treated differently.
What happens when an IPO is oversubscribed?
As earlier mentioned, an IPO is oversubscribed when investors apply for more shares than are available.
Let’s assume a company offers 1 million shares to investors, and by the time the offer closes, investors have applied for 3 million shares. This means that the IPO is oversubscribed by three times.
There are now more applications than shares available, so the issuer cannot give everyone the full number of shares they requested. Thus, the basis of allotment becomes important.
Depending on the structure and terms of the offer, the process may involve:
- Considering the minimum subscription
- Separating investors into applicable categories
- Scaling applications
- Allocating shares proportionately
- Using a ballot where provided
- Giving investors a partial rather than a full allocation
The SEC’s rules provide for a minimum modified pro-rating approach in certain oversubscribed offers, in which investors receive the minimum subscription units specified in the offer documents, and the residual balance is then pro-rated. The precise rule applicable to an IPO should always be checked against that offer’s approved documents.
So, for IPO allocations in Nigeria, the actual outcome depends on the offer structure and its approved basis of allotment.
What should you do if you’re applying for the Dangote Refinery IPO?
Before applying:
- Read the prospectus: Understand the offer price, minimum subscription, eligibility requirements, risks, and other terms before making an investment decision.
- Know how much you want to invest: Decide how many shares you want to apply for based on your own investment goals and circumstances. Don’t assume that applying for more guarantees means receiving more.
- Use an approved subscription channel: The SEC has specifically advised investors to make applications and payments only through officially designated and approved receiving agents, subscription channels, and platforms. It also warns investors to ignore unsolicited offers that promise guaranteed or preferential allocations. One of the approved stockbrokers for this offer is Zedcrest Securities, which offers the shares via the Zedcrest Wealth app and web portal (for Nigerians in the diaspora).
After applying
Keep your application details and wait for the allotment process to be completed.
Then check:
- Your final number of shares allocated
- Whether your allocation is full or partial
- Any applicable refund
- When the shares are credited
- The relevant listing and trading information
FAQs about IPO allocations in Nigeria
1. What does IPO allotment mean?
IPO allotment is the process of determining how many shares each applicant receives after a public offer closes.
2. What is the difference between IPO subscription and allocation?
Your subscription is the number of shares you request. Your allocation is the number of shares you actually receive.
3. What happens if an IPO is oversubscribed?
When more shares are requested than are available, the shares have to be distributed according to the applicable basis of allotment. Depending on the offer, this can involve mechanisms such as minimum subscriptions, pro-rata allocation, scaling, balloting, or partial allocation.
4. What is pro-rata allocation?
Pro-rata allocation distributes available shares in proportion to eligible applications, subject to the specific rules of the offer.
5. What does scaling mean in an IPO?
Scaling involves adjusting applications or allocations to fit the number of securities available under the applicable allotment methodology.
6. What is a ballot in IPO allocation?
A ballot is a selection mechanism that may be used where provided for under the terms of an offer. Investors should check the specific prospectus rather than assume that every oversubscribed IPO uses a ballot.
7. What is partial allocation?
Partial allocation means receiving fewer shares than you originally applied for.
8. Do investor categories affect IPO allocation?
They can, depending on the structure and terms of the particular offer. An IPO may have separate categories or portions for different types of investors, so the prospectus is the best source for the applicable rules.
9. Will I get all the shares I applied for?
Not necessarily. If an IPO is oversubscribed, you may receive fewer shares than you requested.
10. Does applying for more shares guarantee a larger allocation?
No. The final allocation depends on the applicable allotment process and the number of shares available. So, if you’re deciding how many shares to apply for, don’t treat a larger application as a guaranteed route to a larger final holding.
11. What happens to the money for shares I don’t receive?
Any surplus subscription funds are handled in accordance with the refund process outlined in the relevant offer documents. Refunds will be made to your associated bank account.
12. When will I know my IPO allocation?
You’ll know once the allotment process has been completed and the final basis of allotment has been cleared and communicated through the applicable channels.
