What Is an Indication of Interest (IOI)? How It Works and Example

What Is an Indication of Interest (IOI)?

An indication of interest is an underwriting expression showing a conditional, non-binding interest in buying a security that is currently in registration and awaiting approval by the Securities and Exchange Commission (SEC). The investor's broker must provide the investor with a preliminary prospectus. However, IOIs have similar intent but are done differently when it comes to mergers and acquisitions (M&A).

How an Indication of Interest (IOI) Works

In the securities and investing world, an indication of interest is typically expressed in advance of an initial public offering (IPO). It demonstrates a conditional, non-binding interest in buying a security that is currently awaiting regulatory approval as securities in the U.S. must be cleared by the SEC.

The IOI is non-binding because it is illegal to sell a security while still in the registration process. The investor's stockbroker must provide the investor with a preliminary prospectus. The IOI remains open-ended and is not a commitment to buy.

An IOI comprises expressions of trading interest that contain one or more of the following elements:

• The security name
• Whether the participant is buying or selling
• The number of shares, capacity, and/or
• Price of the purchase or sale

Firms and broker-dealers can communicate electronically. They can also advertise proprietary or client trading interests in the form of IOIs to the marketplace, either through their own systems or through dedicated trading platforms.

Indications of interest for IPOs are usually accepted on a first-come, first-served basis. Because the demand for securities may exceed the supply available to distribute, placing an indication of interest does not guarantee you'll be able to buy into an IPO.

IOIs in Mergers and Acquisition (M&A)

An indication of interest in mergers and acquisitions is similar in intent to an IOI for an initial public offering. But there are some different components involved. Once again, it is a non-binding agreement, but this kind of IOI usually comes as a prepared letter written by a buyer and addressed to the seller.

The purpose is to communicate a genuine interest in purchasing a company. Among other things, an IOI should provide guidance on a target valuation for the acquisition target company, and it should also outline the general conditions for completing a deal. Elements of a typical IOI for M&A often include, but are not limited to:

• The approximate price range. This can be expressed in a dollar value range, such as $10 million to $15 million. In other cases, it can be stated as a multiple of EBITDA like 3 to 5x EBITDA. A buyer’s general availability of funds and sources of financing.
• Management retention plan and the role of the equity owner(s) post-transaction.
• Necessary due diligence items and a rough estimate of the due diligence timeline.
• Potential proposed elements of the transaction structure (asset vs equity, leveraged transaction, cash vs equity, etc.).
• The timeframe to close the transaction.

Indication of Interest (IOI) vs. Letter of Intent (LOI)

An indication of interest (IOI) is an informal notice of an investor's interest in purchasing or acquiring an asset. It is non-binding and less definitive than a letter of intent (LOI). The indication of interest includes value ranges and less specific transaction details. The IOI, coming before the LOI, begins the negotiation process.

At the end of negotiations, the formal LOI is created, defining the specific details of the transaction. Like the IOI, it is not a legally binding agreement. Rather, it expresses the investor's commitment to purchase a security and serves as the foundation for the formal contract.

Upon review, an agreement can be made if the seller accepts the terms of the LOI. Upon execution, the seller enters an exclusive agreement with the buyer, prohibiting them from engaging with other buyers for a period.

Example of IOI

In May 2008, Blackbaud's chief executive officer (CEO) Marc Chardon submitted a revised IOI to Richard LaBarbera, president and CEO of Kintera. The offer expressed Chardon's interest in acquiring 100% of his company. In the notice, he asked for a time-bound exclusive deal in exchange for a higher all-cash offer.

Details in the IOI included:

• The purchase price of $1.12 per share
• Its commitment to an all-cash offer
• Approvals and closing conditions
• A management retention plan
• An estimated closing date of July 1, 2008

In its management retention plan, Chardon proposed that Kintera's CEO and some executives and senior managers would receive employment agreements. The IOI also outlined the exclusivity conditions. It stated that until the purchase agreement was executed or when the purchaser terminated negotiations, Kintera could not enter into an agreement with a third party regarding an acquisition, discuss or negotiate with a third party, provide information about Kintera to a third party, solicit proposals, or allow representatives of the company to engage in any of these prohibited activities.

The end of the notice listed the binding provisions, including the notice's termination date (May 21, 2008) and statements about the IOI being a non-binding precursor to an agreement.

The Bottom Line

An indication of interest is a brief letter or notice that expresses a buyer's interest in buying a security in registration or a company's interest in acquiring another company. For investments, the IOI precedes the IPO, and in finance, it precedes the letter of intent. Although it is not a formal agreement, it carries weight as it communicates the serious interest of the buyer.