An initial public offering (IPO) in which an issuer and its underwriter specify a price range (lower and upper bounds) within which investors can bid for the issued securities. Bidding involves specification of the desired number of securities and corresponding price (i.e., the price investors are willing to pay).
The offering has a cut-off price– i.e., the price at which the subscribed securities are allotted to investors. However, the final price is set based on the demand identified at different price levels. The IPO is executed by means of book building and hence it is more flexible as a method and allows a wider investor participation.
A book building IPO differs from the fixed price book building as the latter involves a fixed price set by the issuer for the securities being offered. The underwriter syndicate then sells the securities to investors at the fixed price. In a book building IPO, the price of the securities is determined based on the demand from investors. Investors bid for securities, and the price is set based on the bids received. The issuer and the underwriter work together to identify and determine the appropriate offering price based on investor demand. The underwriter then sells the securities to investors at the final price. However, book building IPO leads to a more accurate pricing of the securities (the best price that can be achieved in view of market conditions).
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