While issuers must offer their securities at a fixed price, a prospectus may sometimes allow selected dealers some flexibility in the price they offer investors who purchase in sufficient volume. More specifically, a selected dealer may offer a price credit by taking a reduction in the amount of its selling commission. The selling concession, remember, is the selected dealer’s compensation for selling its allotted units or shares.
To the customer, a reduced selling commission takes the shape of a credit, reducing the unit price of the purchased shares. To the issuer, the price of the offering remains fixed.
When enough units are purchased to qualify for a discount, the selected dealer will apply the discount only to the part of the purchase that exceeds the threshold, not to the entire purchase. The credit is applied by adding to the number of units the investor receives, rather than reducing the amount the investor pays. In other words, customers will pay full price for all the units they have agreed to purchase, but then they will receive additional units at no cost in the amount of the reduced selling commission.
Example: Allie buys $1,000,000 worth of DPP units from a selected dealer at $20/unit. For the first $500,000, the dealer receives the full amount of its $0.75/unit selling commission. The next $500,000 worth of units is sold at a volume discount. The selected dealer reduces its selling commission by $0.10 per unit and takes a $50,000 hit for the additional sales. For the customer, this $50,000 translates into an additional 2,500 shares (= $50,000 / $20/unit), which Allie receives at no additional cost.
