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Series 79 practice questionmediumBook Building Process

During the book-building process for an IPO, what types of orders do institutional investors typically submit?

  1. AOnly market orders for a fixed number of shares
  2. BIndications of interest specifying a number of shares at various price levels (e.g., 'we want 500,000 shares up to $22, or 300,000 shares up to $24'), which are not binding commitments✓ Correct answer
  3. CBinding orders that cannot be modified or withdrawn
  4. DOrders placed through the stock exchange's electronic trading system
Explanation

Why B — Indications of interest specifying a number of shares at various price levels (e.g., 'we want 500,000 shares up to $22, or 300,000 shares up to $24'), which are not binding commitments

During the book-building process, institutional investors submit indications of interest (IOIs) that specify the number of shares they would like to receive at various price points. These are not legally binding commitments and can be modified or withdrawn at any time before the final allocation. The bookrunner uses these IOIs to build a demand curve that helps determine the optimal offering price. This process allows the underwriter to gauge both the quantity and quality of demand, balancing price maximization for the issuer with the goal of building a stable, long-term shareholder base.

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