Financial Topics Archives | Page 428 of 791

Sep

2023

Testing the Waters: What It Means in an IPO

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

Testing the waters in the initial public offering (IPO) process allows companies and related parties that are looking at going public to gauge how successful their prospective IPO would be — without going through the actual process of going public.

The Securities and Exchange Commission (SEC) voted in 2019 to adopt a new rule to allow companies interested in going public to test the waters (TTW). Specifically, the SEC formally rolled out Rule 163B under the Securities Act on December 3, 2019.

The IPO process can be long, costly, and risky for some companies, and thus some companies can be reluctant to try going public. But the ability to test the waters by communicating with potential investors, gauging their interest, and examining how an IPO would be received, is valuable before having to go all-in on a public offering.

Key Points

• Testing the Waters (TTW) is an SEC rule that allows companies to gauge the success of a prospective IPO without going through the actual process.

• The JOBS Act of 2012 allowed small businesses to communicate with Qualified Institutional Buyers (QIBs) and Institutional Accredited Investors (IAIs).

• Testing the Waters allows companies to assess investor interest, explain the direction of the company, and strengthen areas of weakness.

• The expanded rule for all issuers allows for greater transparency and communication between IPO-hopeful and the markets, as well as investors.

• Investors have access to additional information about a company’s expected IPO and more time to decide whether to invest.

Testing the Waters During the IPO Process

Starting in 2012, testing the waters was available only for emerging growth companies, also known as EGCs. In 2019, testing the waters was extended to all issuers to increase the chance of a company successfully completing an initial public offering (IPO), and to encourage issuers to enter the public equity markets.

So, what does testing the waters mean, and how does it work? In effect, testing the waters is a way for issuers to dip their toes in the water, so to speak, and gauge the temperature before fully jumping into the IPO process.

When the new SEC rule was proposed and adopted in September 2019, Chairman Jay Clayton said, “Investors and companies alike will benefit from test-the-waters communications, including increasing the likelihood of successful public securities offerings.”

Details of the TTW rule

The TTW rule allows issuers to assess market interest in a possible IPO (or other registered securities offering) by being able to discuss the IPO with certain institutional investors before, or after, the filing of a registration statement.

Generally, issuers set up TWW meetings with investors after the issuer has filed with the SEC. They could potentially speak with specific issuers before filing with the SEC, but issuers typically want to align on the first round of SEC comments and then have a clear direction when speaking with potential investors.

Example of Testing the Waters

In late spring of 2022, a tech company that created a platform for grocery delivery, decided to test the waters for a potential IPO.

There were good reasons for the company to be cautious. The market had seen a steep drop since the beginning of the year, and investors had largely cooled on tech stocks, with IPOs taking a noticeable hit year-over-year.

Thanks to taking this step, the company was projected to IPO by the end of 2022, using the interim period to adjust their valuation and their path forward, given the competition in the space.

To sum it up, testing the waters allows companies to see what investors say, answer questions, and potentially identify areas of weakness that could be strengthened.

💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.

Purpose of Testing the Waters

Testing the waters has two chief aims: The first is communicating with potential investors to explain the direction of the company and gathering their feedback. The second is to evaluate the market before having to invest large sums in an actual IPO.

💡Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Communication with Potential Investors

In addition to giving issuers a chance to see whether their offering will be successful, TWW allows companies to communicate highly specific information.

Some industries call for greater detail of information from investors, which makes testing the waters ever more critical.

For example, in the life sciences industry, testing the waters is popular because issuers tend to have a shorter operating history and also need to communicate detailed scientific information to their potential investors. For these types of industries and issuers, testing the waters is highly beneficial.

Cost-Effective Market Evaluation

Testing the waters allows issuers to determine whether it makes sense for them to devote the time and resources to filing an IPO. Before the TWW rule, many companies avoided the IPO process because of the cost and not having clarity around investor demand.

Testing the waters takes away some of those risks and provides more information as a company enters the IPO. In a sense, it allows for a company to evaluate the market, and for the market, in turn, to evaluate the company exploring an IPO.

What the JOBS Act Meant for Testing the Waters

In 2012, Congress under President Obama passed the Jumpstart Our Business Startups Act (also known as the JOBS Act) to revitalize the small business sector. The JOBS Act, which created Section 5(d) of the Securities Act, made it easier for small businesses, also known as emerging growth companies or EGCs, to gain access to funding. It removed certain barriers to capital and reduced regulation.

The enactment of the JOBS Act also allowed small businesses to communicate with potential investors — qualified institutional buyers (also known as QIBs) and institutional accredited investors (or IAIs). By communicating with potential investors before or after filing a registration statement, EGCs were given the ability to get a sense for interest in a potential offering.

With the expansion of that rule in 2019 to include all issuers, not just EGCs, more opportunity opened up for a range of businesses.

What Does This Mean for Investors?

While it makes good business sense to expand regulations and allow all businesses considering an IPO to test the waters, just what does this all mean for the average retail investor?

First, the expanded test-the-waters rule for all issuers allows companies more flexibility when determining whether to move forward with an IPO. So for investors, the expanded rule means that they have access to communication from issuers regarding upcoming IPOs. They also have more time to determine whether it’s the right investment for them.

This can be valuable for retail investors, who may benefit from having additional information about a company’s expected IPO. Investing in IPO stock can be highly risky, as IPO shares are typically quite volatile.

In short: Testing the waters gives more flexibility to both issuers and investors.

Investing in IPO Stocks

IPOs have been popular among investors and certain IPOs can generate excitement in the investor community. Prices on the day of an IPO and immediately afterward tend to produce volatile price movements, which can produce large gains or losses. Luckily, the 2019 SEC rule that allows any company to test the waters before committing to the IPO process is a boon to businesses as well as investors.

TTW, as the rule is known, allows for greater transparency and communication between the IPO-hopeful and the markets, as well as investors, prior to the full-blown IPO process. This enables companies to adjust their strategy for the IPO, and it allows investors to assess whether they want to invest.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Is testing the waters an offer?

No, testing the waters is not an offer. Testing the waters in the IPO process allows issuers, which are corporations, investment trusts, etc., to gauge interest and investor demand for a potential IPO without actually having to go public.

What is the post-IPO quiet period?

The quiet period is a set amount of time when the company cannot share promotional publicity, forecasting, or expressing opinions about the value of the company. In an IPO, the quiet period begins when a company files registration with U.S. regulators for 25 days after the stock starts trading — and sometimes longer.

What is an analyst day in an IPO?

When planning to go public, the issuer or company meets with syndicate analysts who do not work for the issuer or the company going public. This type of meeting, also called an “analyst day,” is important because analysts create their own opinion about the issuer. They then help educate the market about the company once the transaction has launched.

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Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Sep

2023

How to Find Upcoming IPO Stocks Before Listing Day

By Anna Davies | Growing Wealth, invest, Investing | Comments Off

Accessing and purchasing a stock at its initial public offering (IPO) can seem like a VIP invite to a party. In addition to the cache of being “in the know” about potential opportunities, IPOOwing to the excitement that can accompany news of an upcoming initial public stock offering (or IPO), many investors seek ways to learn more about these companies prior to the listing day. Fortunately, there are many resources and services that track upcoming IPOs.

Using these IPO trackers, it’s possible to learn more about the status of various public offerings.

For investors interested in buying IPO stock prior to its actual public offering day, that can be more complicated. If a company launches an IPO, it means that it’s only had private investors, such as angel investors, up to that point but it’s now ready to let other investors purchase shares.

Key Points

• It’s possible to find upcoming IPO stocks before listing day with the use of resources such as media outlets, exchanges, brokerages and financial institutions.

• When people talk about getting IPO stock at IPO prices, they may be referring to the offer price available to a limited group of people, or the price available to all investors once the company goes public.

• Investors who plan to wait until the unlisted stock debuts may find themselves frustrated that there is little prep time before the stock appears on the market.

• When considering investing in a company as it goes public, investors should thoroughly vet the company and its financials and ask themselves questions such as whether they understand the business and the potential investment risks.

• While investing in IPOs can be exciting, they can also be risky and require active management and quick decisions regarding holding or selling.

When IPOs Are Offered to People Prior to Listing Day

When people talk about getting IPO stock at IPO prices, they may be talking about two things:

• The IPO offering price. This is a fixed price available to a limited group of people. This may include employees who were offered stock options as part of their compensation package, as well as certain investors who get access to the IPO fixed rate. This may be less than the share price set when the company goes public. All of these sales occur before trading day and can be tricky to navigate.

• The price of new IPO stocks once the company goes public. This is the price that is available to all investors and fluctuates based on market conditions.

Buying IPOs at their offer price can take some navigation, but that does not mean it’s impossible. Typically, offer prices may be offered only to certain brokerages.

One way that buying IPOs at offer prices differs from buying stocks already in the market: Only a certain number of shares are available to each brokerage, and they may be accessible to investors who have the highest account balances or meet other suitability requirements for trading IPO shares.

The trading process is also different: Instead of simply buying the shares, an eligible investor submits an indication of interest (IOI) letter. An investor’s ultimate buy order may be limited due to availability.

In part, this system evolved to protect investors who may be interested in IPO shares because of the headlines about fortunes made overnight. In reality, many investors have lost their fortunes when the IPO has not panned out.

💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

How Do You Find Upcoming IPO Stocks Before Listing Day?

Investors who plan to wait until the unlisted stock debuts may find themselves frustrated that there is little prep time before the stock appears on the market.

The secrecy prior to an initial public offering reflects several factors: One is the registration process with the Securities and Exchange Commission (SEC). The company can not publicly sell or trade its stock until the SEC deems the registration statement effective.

Once the company has filed its registration, the company enters what’s known as a “quiet period” where it must adhere to restrictions on what and how much it communicates to the public.

Any “gun jumping” or public communication that nods or hints at an upcoming IPO may violate the Securities Act. But once a company registers with the SEC investors and stock market analysts will keep an eye out for the IPO.

So, beyond combing through the SEC database, how can an investor find new companies going public? There are many resources:

Media Outlets

Media outlets often report on upcoming and rumored IPOs. Reading through market news can be valuable for new and experienced investors alike, allowing them to have an enhanced perspective on how the market is evolving and which companies may be poised to IPO.

Exchanges

Exchanges, such as Nasdaq, also have trackers on upcoming IPOs, although these are IPOs likely to debut within the next several days.

Brokerage News

Brokerages and financial institutions may also report on industry news and trends and may publish IPO tracking.

Vetting Upcoming IPOs

With a range of IPOs taking place in some years, qualified investors will need to vet any potential offering before they decide to add it to their portfolio. If you’re considering investing in a company as it goes public, you’ll want to comb through all of its public documents to see whether its financials look sustainable. Then, ask yourself the following questions:

• Do I understand the business and the potential investment risks?

• Is the IPO underwriter a well respected, major investment firm?

• How are other companies in this space performing?

• Do the financials justify the IPO price and company valuation?

Recommended: How to Value a Stock

The Pros and Cons of Investing in IPOs

Access to IPO investing can be exciting. It can make an investor feel like they’re investing in dynamic companies that may be shaping the way we live and work. But they can also be risky. Some companies that may get a lot of media attention may fail to live up to investor expectations. Other companies may hit bumps in the road as they adjust to being a public company facing investor scrutiny.

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Pros of Investing in an IPO

• It can be exciting.

• There’s potential for significant profits.

• It can allow investors to put their money behind a company they may value, believe in, or otherwise want to be a part of in some small way.

Cons of Investing in an IPO

• While there’s potential for reward, there’s also risk potential that the IPO may flop.

• Market fluctuations may require active management and quick decisions when it comes to holding or selling.

• The volatility of investing in an IPO may require portfolio calibration so that other investments are less volatile.

The Takeaway

While it may be possible to find upcoming IPO stock before listing day (more here), these shares are usually available only in certain circumstances to qualified investors. That’s partly owing to the careful regulation of the initial public offering process, but it also helps to protect eager investors from getting caught up in media hype and making a potentially risky investment on the spur of the moment.

Invest with as little as $5 with a SoFi Active Investing account.

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

Sep

2023

IPO vs Acquisition: Advantages and Disadvantages

By Paulina Likos | Growing Wealth, invest, Investing | Comments Off

An IPO is an initial public offering, when a company makes its shares available for public trading, and it’s quite different from an acquisition. IPOs are synonymous with entering the public market, while an acquisition is typically when a larger company takes over a smaller target company.

What does IPO mean vs. an acquisition for investors? When a company applies for an IPO, it enters into the traditional process to be listed on a public exchange and get funding. In an acquisition, or takeover, the target company may not survive — or it may thrive, but only as part of the newly combined organization.

Investors contemplating companies at these two different stages would do well to think through the benefits and risks.

Key Points

• IPOs, or Initial Public Offerings, allow private companies to offer shares to the public to raise capital and enhance visibility.

• An acquisition occurs when one company buys a significant part, or all, of another company, taking control over its assets and operations.

• IPOs involve going public to raise funds and gain publicity, while acquisitions entail one company taking over another, potentially merging their resources and strategies.

• IPOs can provide substantial funds and publicity but involve high costs, stringent regulations, and expose companies to market volatility.

• Acquisitions can foster growth and innovation but may lead to conflicting priorities, strained partnerships, and brand reputation risks.

How IPOs Work

When companies go public, that’s when a private company decides to sell its shares to investors, to raise capital to fund growth opportunities for the company; create more awareness about the company; or to acquire other businesses, among many other possible reasons.

The IPO is the process of selling securities to the public. The company decides how many shares it wants to offer. The price of the company shares are determined by the company’s valuation and the number of shares at listing, and the funds raised by the IPO are considered IPO proceeds.

Once the IPO is approved, the company is then listed on a public stock exchange where qualified investors can buy shares of the IPO stock. Because IPO stock is highly volatile, it can be risky for retail investors to plunge into IPO investing, so doing the usual due diligence for investing in any type of security is wise.

Advantages of Going Public

What are the advantages of going public? There can be many, which is why companies aspire to go through what can be an arduous, time-consuming, and expensive process.

Capital for Investment

The biggest advantage associated with an IPO is fundraising. Once investors start buying IPO stocks, the proceeds from an IPO can be substantial. The company then takes this capital and typically uses it toward internal investments and expansion.

The company can use the funds it raises for research and development, to hire more staff, or expand its operations in other states or countries. There are a variety of ways this new capital can be deployed to benefit the company.

Publicity

In some cases, IPOs generate publicity. This, in turn, can drive more attention to the company and make investors interested in purchasing shares of its stock. IPOs are frequently covered in business news, which adds to the IPO buzz.

However, if there is too much hype, that can contribute to high expectations for the stock, which can also create volatility after the IPO.

Valuation

Some companies that go public can end up having higher valuations. Certainly, that is a hoped-for result of the IPO process. Because the public company has access to more capital and steadily grows its business, the shares of the company can increase in price over time, but they can also lose value — a common occurrence.

Disadvantages of Going Public

What are the disadvantages of going public? There are a series of steps and regulations companies must adhere to in order to have a successful IPO — and the process can be time consuming and difficult.

High Cost

The first factor a company must consider is cost. The company needs to work with an investment bank, which will charge underwriting fees — one of the largest costs associated with an IPO.

Underwriting is mandatory to review the company’s business, management, and overall operations. Legal counsel is also required to help guide the company through the IPO. There are also costs associated with account and financial reporting. Companies will also accrue fees for applying to be listed on the exchange.

Not Enough Information for Investors

From an investor’s perspective, investing in an IPO can also be a challenge. In many cases, individual investors don’t have enough information or historical data on the company’s performance to make a determination on whether an IPO is a sound investment.

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Stock Market Stress

Once a company goes public, it is now part of the public market. This means it is subject to scrutiny, market volatility, and investor sentiment. Every move and decision the company makes, such as a corporate restructuring, merger and acquisition, change in leadership, or release of earnings reports, will be reviewed closely by industry analysts and investors, who will provide their own opinions on whether the company is operating well or not.

While the company’s leadership may not have had to worry about these aspects when it was private, a public company needs to keep these market pressures top of mind.

What Is an Acquisition?

What does it mean for a company to be acquired? Similar to a merger, an acquisition is when one company buys a portion or the whole of another company and all its assets. An acquisition is the process of the acquiring company taking full control of the target company.

If the acquiring company takes more than 50% of the target firm’s shares, this gives the acquiring company control over decision making regarding the target company’s assets. While acquisitions of well-known and larger companies occur and are covered by the news, companies of any size can be the acquiring company or target company.

Advantages of Being Acquired

Being acquired doesn’t have to signal the end of a company — sometimes it can be a lifeline.

Growth

An acquisition can be a strategy for a company to grow into new markets and quickly become a leader in its industry. If the company is working in a competitive landscape, an acquisition helps increase its value and can add to a company gaining more market strength.

Innovation

When one company acquires another, this allows resources and experiences to come together. This may enable the new company to innovate new ideas and strategies that may eventually help grow the company’s earnings. This new partnership can bring together a new team of specialists and experts that can allow the company to develop and reach its goals.

More Capital

When an acquisition occurs, this will increase the cash holdings and assets of the acquiring company and usually allows for more investment in the newly formed company.

Disadvantages of Being Acquired

It’s hard to avoid the negative implications of an acquisition, and investors need to consider these as well.

Conflicting Priorities

In some acquisition scenarios, there may be competing priorities between the two companies that come together. The acquiring company and target company prior to the acquisition were used to working as individual entities. Now, as a newly formed company, both sides must work together to be successful, which is easier said than done. If there isn’t alignment on the goals of the organization as a whole, then there is a possibility that the acquisition may fail, or the transition could be rocky and prolonged.

Pressure on Existing Partnerships

When an acquisition occurs, the newly formed company becomes bigger and it is likely that their goals will grow as well. In the case where the company wants to develop more products to expand into new markets, this could require their suppliers to figure out how they are going to ramp up production to meet the demand.

For example, this could mean the supplier would need more capital to hire staff or purchase additional equipment and supplies to prevent production issues.

Brand Risk

Depending on which companies come together, if one has a poor reputation in their industry, the acquisition could put the other company’s brand at risk. In this case, both of the companies’ identities could be evaluated to decide whether they come together under one brand or are marketed as separate brands.

The Takeaway

Initial public offerings (IPOs) and acquisitions often get a lot of media and investor attention because they can offer opportunities for investors. That said, these two events are quite different.

An IPO is when a private company decides to go public and sell its shares to investors, whereas an acquisition is when a company buys out another, target company. In this case the acquiring company may gain certain market advantages, and the target company will typically lose its decision-making privileges since it is no longer an individual company.

There are a number of pros and cons to IPOs, just as there are advantages and disadvantages to a company being acquired. IPOs can provide a newly minted public company with a lot of growth opportunities — but the IPO process is expensive and time consuming, and being beholden to regulators and investor sentiment is never a picnic.

Acquisitions can be a lifeline to a company that’s struggling in a competitive market. While the takeover can effectively eliminate the target company as an independent entity, its products or brand may continue to exist.

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FAQ

Is an acquisition an IPO?

An acquisition is not an IPO. An acquisition is when an acquiring company purchases part of or all of a target company to form one new company.

What is the difference between an IPO and a takeover?

An IPO is when a private company decides to go public and sell its shares to individual investors, whereas a takeover is when a company buys out another company.

Is a takeover the same as an acquisition?

An acquisition can be a takeover. This is when two companies decide to come together and become one entity. All the assets of both companies are now part of a newly formed combined company.

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Sep

2023

IPO Oversubscription: Definition & Examples

By Kenny Zhu | Growing Wealth, invest, Investing, Terminology | Comments Off

When an IPO is “oversubscribed” that means certain investors have committed to buy more than the available number of shares that were originally set for the initial public offering.

That’s because when new stocks or bonds are issued via initial public offerings (IPOs), they’re issued in limited amounts, based around the new company’s financing needs and desired debt-to-equity structure.

Depending on investor appetite for the new stocks, IPOs can either be under or oversubscribed; this reflects the level of demand investors have for the shares.

In most cases, though, only institutional investors and accredited investors can subscribe to an IPO stock before it actually goes public. Retail investors may hear about an IPO being over- or undersubscribed, but they typically can’t take advantage of it — although knowing the information may aid an individual’s assessment of the opportunity.

Key Points

• Oversubscription for an IPO means that investor demand is higher than the available number of shares.

• Oversubscription can benefit the issuing company by providing additional funding and the underwriting team by generating fees.

• Early investors may benefit from the initial pop in pricing caused by excitement.

• Retail investors should be cautious when investing in IPO shares due to potential overinflation and the possibility of a price tumble.

What Is Oversubscription in an IPO?

Investors interested in IPO investing may be interested in an IPO’s subscription status. If an IPO is oversubscribed, that means there aren’t enough shares of the new stock issued to meet initial investor demand at the listed IPO price.

To compensate for this mismatch in supply and demand, the underwriters selling the IPO can choose to either raise the IPO price to reduce demand, or increase the supply of shares to meet demand.

💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.

How Does Oversubscription Work?

Oversubscribed IPOs generate a shortage in shares that usually results in a higher price or additional shares being issued, which can lead to more capital being raised for the now-public company. These funds are also called the IPO proceeds.

This contrasts with “undersubscription” for IPOs. Undersubscribed IPOs are caused by the converse scenario happening, where there’s insufficient investor demand to buy all available shares at the listed IPO price.

What Is Undersubscription?

When an IPO is undersubscribed, it generally signals a lack of enthusiasm for a newly public company and may be the result of either poor marketing, overpricing, or poor company fundamentals.

When an IPO is undersubscribed, underwriters may work to reduce the size of the issue, cut the share price, or pull the IPO offering altogether.

In some cases, as a result of contract terms with the issuing company, underwriters may be forced to “eat” the cost of the IPO and purchase remaining shares at a pre-agreed price themselves. This is generally an undesirable outcome for underwriters as it may force them to hold shares on their books rather than flip them to investors.

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Pros of Oversubscription

Oversubscription can be beneficial to both the issuer and underwriters of new securities, as well as to investors who manage to obtain an allocation of shares around the IPO price.

The issuing company can benefit, as the high demand for IPO shares allows the underwriting team to either reprice the IPO shares higher or offer up additional shares from company reserves to alleviate demand.

In either case, this results in additional funding for the issuing company at more favorable terms while the underwriter generates additional fees.

Early investors to an oversubscribed IPO may benefit from the initial pop in pricing that excitement can generate. This sometimes leads to positive momentum that may continue to push the price upward in the short run.

Cons of Oversubscription

For most average investors, oversubscription ends up being a net negative. First, it’s rare for individual investors to be able to subscribe to an IPO. Typically that’s reserved for large institutional or high-net-worth investors. Then, by the time the average investor can buy the stock, higher pricing may make the IPO opportunity less attractive — with the risk of being overinflated.

If you’re unable to obtain an allocation at the original IPO price, it’s likely that secondary market prices for these securities may be substantially higher due to the high demand for these shares.

While this may not be a concern for long-term investors, this can pose a challenge if initial momentum causes the price of a new security to skyrocket beyond its reasonable fundamental value. This can cause the value of shares to tumble back to lower levels in subsequent months.

This is one of many reasons that retail investors should be cautious about IPO shares. They are a high-risk proposition at best.

Strategies to Maximize the Oversubscription Opportunity

Even if you were one of the lucky few to obtain early IPO shares, there isn’t much you can do to capitalize on an oversubscription opportunity.

If you receive shares from an oversubscribed IPO, you will want to consider both the long-term prospects of the company as well as the short-term prospects for its share price.

Depending on the company and your investment strategy, this will influence whether you intend to hold the security for the long-run or flip the shares for a quick profit.

If you’re unable to obtain an allocation during an IPO, it’s likely that the oversubscribed IPO would see its shares bid up in the secondary market. In this case, it’s not a bad strategy to wait a few weeks, or even months, after the initial IPO to see whether prices come back down — and gauge the company’s prospects from there.

In some instances, shares often decline a few months later after the expiration of the initial lockup period, once insiders are free to sell their shares. However this isn’t always the case, and can vary widely from company to company.

Seek Advice From a Professional

If you’re allocated shares from an IPO and are unsure of what to do with your new holdings, it might be worth consulting with a financial advisor or investment advisor to determine your next steps.

Financial professionals can help inform your decision making on how to proceed with an oversubscribed IPO. However, the final decision will ultimately be up to you and should be made within the context of your overall investment portfolio.

Do Your Research

Regardless of whether you’re able to gain access to the IPO, you should base your investment decisions on your own due diligence and fundamental analysis, i.e. a thorough review of a company’s disclosures, financial statements, and future prospects.

Reviewing the track record of company executives and the board of directors can offer insight into how competent the company’s management may be when it comes to executing on long-term strategies.

Thoroughly reading the prospectus of the new IPO shares can help you understand the core drivers of a firm’s business, its core customer base, key markets, and major risks it might face.

Additionally, there’s a multitude of research out there that follows your stock’s performance on both fundamental and technical grounds; these can go a long-way towards informing your investment actions for new IPOs.

The Takeaway

Oversubscriptions for hot IPOs can sometimes offer opportunities for investors who are able to secure allocation of shares; however, they can also turn into feeding frenzies for retail investors who wish to buy these securities on the secondary market.

The resulting media blitz, and (typically) wide swings in valuations, can easily end with inexperienced investors getting burned on the share price. In short: IPOs can be volatile. To protect yourself, it’s important to understand the drivers of IPO pricing and how it impacts demand.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is the meaning of oversubscription?

Oversubscription, as it pertains to IPOs, refers to a supply and demand mismatch of the newly issued IPO shares. Either the price must adjust upward, the supply of shares issued must be increased, or a combination of the two must occur to meet investor demand.

In the event that the supply of IPO shares is unable to meet all investor orders, shares will typically be issued out to investors on a partial pro rata basis, or in proportion to each investor’s requested order size, subject to minimum block sizings.

In some instances, a lottery system may be implemented to maintain impartiality. Any unfilled orders will be rejected and cash returned to investors.

How can you calculate oversubscription?

At the basic level, IPO oversubscriptions are calculated as a ratio of the aggregate order size for IPO shares relative to the total number of IPO shares available to be distributed.

For example, if there are 1,000,000 shares of new stock available for an IPO pricing, but the underwriters receive an orderbook totaling 3,000,000 shares from investors, this IPO would be considered “3X oversubscribed.”

Photo credit: iStock/nensuria

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

Sep

2023

Can I Be a First-Time Homebuyer Twice?

By Kim Franke-Folstad | Family Finances, Home Ownership, mortgage | Comments Off

The term “first-time homebuyer” may sound really specific, but it isn’t nearly as limiting as you might think. Even if you’ve owned a home before, you still may be eligible for many first-time homebuyer assistance programs.

That’s good news if you’re hoping to take advantage of benefits like down payment and closing cost help, which could make a real difference in the type of home you can afford — or whether you can afford a home at all.

Read on to find out how you can be a first-time homebuyer twice and how to make the most of any benefits that might be available to you.

Table of Contents

First-Time Homebuyer Qualifying Factors
Is It Smart to Be a First-Time Homebuyer Twice?
Drawbacks to an FHA Loan for First-Time Homebuyers
Other First-Time Buyer Options
The Takeaway

Key Points

• It is possible to be a first-time homebuyer more than once if certain criteria are met.

• The definition of a first-time homebuyer varies depending on the loan program and lender.

• Factors such as previous homeownership, time elapsed since last purchase, and income limits may affect eligibility.

• Programs like FHA loans and state-specific programs may offer benefits for first-time homebuyers.

• Consulting with a mortgage lender can provide clarity on eligibility and available options for repeat first-time homebuyers.

First-Time Homebuyer Qualifying Factors

If you’ve never owned a home before, you’re obviously a first-time homebuyer. But other criteria also can factor into whether you qualify for first-time homebuyer status and can benefit from assistance programs.

When are you considered a first-time homebuyer again? The U.S. Department of Housing and Urban Development (HUD) says a former homeowner may still qualify if you meet one of these criteria:

You Haven’t Owned a Principal Residence for Three Years

Even if only one spouse qualifies under this scenario, both spouses would be considered first-time homebuyers.

It’s Your First Home as a Single Parent

If you’re a single parent who has only previously purchased a home with a former spouse while still married, you qualify as a first-timer.

You’re a Displaced Homemaker

If you are a displaced homemaker who doesn’t or didn’t earn wages from outside employment and has only ever owned a home with a spouse, you would be considered a first-time homebuyer.

Your Last Home Was Detached

If you’ve owned a primary residence that wasn’t permanently attached to a foundation according to applicable building regulations (such as a mobile home when the wheels are in place), you qualify.

Your Home Was Out of Compliance

If you have only owned a home that didn’t comply with state, local, or model building codes, and could not be brought into compliance for less than the cost of constructing a permanent structure, you can claim first-timer status.

State, local, and private first-time homebuyer programs may have their own qualifying criteria, so it can be a good idea to check out all the rules before starting the application process.

Recommended: First-Time Homebuyer Guide

Is It Smart to Be a First-Time Homebuyer Twice?

Finding a home — and figuring out how to afford a down payment on your first home — can be especially challenging in today’s market, while prices are still high and mortgage rates are rising. But if you’re eligible for one of the many assistance programs created to help first-time buyers, you may be able to improve your chances of (literally) getting your foot in the door.

Many states, cities, and community organizations provide assistance in the form of grants or forgivable second loans that can help with the down payment on your home and/or closing costs. Some of these down payment assistance programs only offer support to those who fall under an income cap. But, according to a report from the Urban Institute, up to 51% of potential homebuyers residing in the U.S. metropolitan areas studied would qualify for some form of home down payment assistance. Some private lenders also offer lower low-interest mortgage loans on conventional loans and other benefits to qualifying first-time homebuyers. And, of course, there are several longstanding federal programs that may offer more lenient income and credit score requirements, smaller down payments, and lower mortgage rates. So it can be a good idea to investigate all the opportunities available to you — and to your spouse if you’re married.

Note: At SoFi, a member cannot be claimed as a first-time home buyer twice.

Benefits of Using an FHA Loan

Whether this is the first time you’ve considered purchasing a home, or you’re a returning first-time homebuyer, you may want to look into the benefits provided through the Federal Housing Authority (FHA) loan program.

The FHA isn’t a lender, so it doesn’t make loans directly to borrowers. Instead, it insures loans made by HUD-approved private lenders. If a property owner defaults on the mortgage, the FHA will pay the lender’s claim for the unpaid principal balance.

Because lenders are taking on less risk with an FHA-insured loan, they can offer more flexible eligibility requirements, lower down payment amounts, and lower closing costs than a buyer might get with a conventional loan. For example, if you have a FICO® credit score of 580 or higher, you may qualify for an FHA loan with just 3.5% down. And even with a score between 500 and 579, you still could be able to get a loan with 10% down.

FHA loans also may offer lower interest rates than comparable conventional mortgages, which could be an important consideration if mortgage rates keep rising in 2023.

Are There Drawbacks to an FHA Loan for First-Time Homebuyers?

FHA loans can be appealing to first-time buyers who are struggling to come up with a down payment, or who have a low debt-to-income ratio or other problems qualifying for a mortgage. But, a potential downside is that the mortgage insurance premiums borrowers typically must pay to get and keep an FHA loan may end up being more expensive than the private mortgage insurance required for a conventional home loan. Here’s what those costs can look like when you compare MIP versus PMI:

• Homebuyers with a conventional mortgage can expect to pay an annual premium for private mortgage insurance (PMI) until they have at least 20% equity in their home. (If you make a down payment of 20% or more, PMI isn’t required.) PMI costs can vary based on the type of mortgage you get, your loan-to-value ratio (LTV), your credit score, and other factors, but generally, the annual premium is 0.5% to 1% of the total loan amount.

• FHA borrowers, on the other hand, are required to pay two separate mortgage insurance premiums (MIP). One premium is paid upfront at closing and is 1.75% of the loan amount. The other premium is based on the amount, length, and loan-to-value (LTV) ratio of the mortgage and is usually paid annually for as long as you have the FHA loan. If you put down at least 10%, you may have the FHA MIP removed after 11 years of payments — but unlike PMI on a conventional loan, there is no equity cutoff for MIP.

As you research different lenders and types of loans, you may want to keep these costs in mind. Remember: Mortgage insurance, whether MIP or PMI, protects your lender, not you, if you default on your payments. You still could ruin your credit or lose your home to foreclosure if you fall behind, so it’s important to keep your payments as manageable as possible.

Other First-Time Buyer Options

FHA loans are a popular borrowing option, but there are many other first-time homebuyer programs that could help you manage your costs, including programs offered by your state or city, or through local charitable organizations. Your real estate agent or lender may be able to help you find a program that’s appropriate for your situation. You also can find information through your state housing finance agency or HUD.

Other federal programs that you may want to consider include:

Freddie Mac Home Possible Mortgages

The Federal Home Loan Mortgage Corporation, known as Freddie Mac, offers the Home Possible mortgage program to help low-income borrowers who hope to purchase their own home. Because the program is backed by Freddie Mac, approved lenders can accept a smaller down payment from qualifying buyers, and some qualifications and terms may be more flexible than with a conventional mortgage.

Fannie Mae HomeReady Mortgages

The Fannie Mae Home Ready Mortgage is another path to homeownership for low-income borrowers. Creditworthy buyers may find lenders are more flexible with their terms and qualifications because these loans are backed by Fannie Mae.

Department of Veterans Affairs (VA) Loans

With a VA-backed home loan, the Department of Veterans Affairs guarantees a portion of the loan you obtain from a private lender. And because there’s less risk for the lender, you may receive better terms. Service members, veterans, and eligible surviving spouses may be eligible for this assistance.

US Department of Agriculture (USDA) Loans

The USDA offers both direct and backed loans to assist very low, low- and moderate-income buyers who want to buy a home in an eligible rural area. Usually, no down payment is required. And more areas of the country are eligible for USDA-loan status than you might imagine.

HUD Good Neighbor Next Door Program

Eligible law enforcement officers, teachers, firefighters, and emergency medical technicians may find housing help through HUD’s Good Neighbor Next Door program. Through this program, certain single-family HUD properties in designated revitalization areas are available for sale to public service workers at 50% off the list price.

Recommended: How Much House Can I Afford?

The Takeaway

If you can qualify for one of the many assistance programs available to first-time homebuyers (even if you’ve owned before), you may be able to significantly reduce the daunting down payment and closing costs that can come with purchasing a home. Or you may qualify for a loan with a lower interest rate.

While you’re considering your options, though, keep in mind that you won’t necessarily have to come up with a 20% down payment if you decide to go with a conventional loan.

FAQ

Can I be a first-time homebuyer again?

Yes, under certain circumstances, you may qualify as a first-time homebuyer even if you’ve owned a home before. You may be eligible for many first-time buyer programs, for example, if you haven’t owned a home in three years.

Can I get an FHA loan twice?

Yes, you can apply for an FHA loan even if you’ve had one before. But you usually can’t have more than one FHA loan at a time.

As a first-time homebuyer, am I required to make a 20% down payment?

No. A first-time homebuyer may be able to qualify for a mortgage with as little as 3% down.

Photo credit: iStock/FG Trade Latin

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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