Traditional procedure for placing securities, in which the issuer and the lead bank agree on the issuing price prior to the publication of the offering prospectus.
Under the fixed-price offering system, the issuing price is calculated on the basis of the company's fundamentals, taking into account the exchange price of comparable companies as well as the general market situation. It is then published in the offering prospectus so that investors can submit requests to purchase shares at this price during the subscription period.
Once the issuing volume is completely subscribed, the lead bank can terminate the subscription process before the official subscription period is over. If an issue is oversubscribed, priority is often given to smaller orders, with the result that institutional investors receive fewer shares than requested. Alternatively, the securities can be divided equally among subscribers, or allotted proportionally. In some cases, a lottery system is used.
Prior to 1996, issuing prices determined using the fixed-price offering system tended to be excessively high, owing to heightened competition among banks for lucrative IPO contracts. In principle, the banks were interested in setting prices that would reflect the current market situation because they wished to avoid difficulties in placing the securities among investors. However, many issuers wanted to inflate prices so as to maximise the capital generated by the issue, and chose as their syndicate leader the bank that offered the highest issuing price in conjunction with relatively low costs. In many cases, issuing prices determined in this way soon underwent a correction to what was considered a more appropriate level, resulting in disappointment among investors and a loss of confidence in the ability of underwriting syndicates to set fair prices. For this reason, alternative procedures such as book-building have become more popular since 1996.
