4.2.4.8. Oversubscription: Order Priority
Recall that the order period is the time set by the syndicate manager during which orders will be solicited for the bonds, usually running from one hour to five days. If the bond issue is oversubscribed (that is, if there are more orders than there are bonds) during the order period, orders will be filled in a certain allocation priority, as indicated in the Agreement Among Underwriters. Sales will be allocated by the type of order received during the order period, not by the time it was entered.
The syndicate must establish priority provisions and a procedure for making changes. Unless the issuer agrees otherwise, such priority provisions must give priority to customer orders over orders by members of the syndicate for their own accounts.
There are four possible types of orders:
1. Presale orders
2. Group net orders
3. Designated orders
4. Member takedown orders
Presale orders are orders made in a competitive sale before the bond’s pricing and terms are finalized. Made primarily by institutional investors, presale orders have the highest priority because they were instrumental in helping the syndicate make its winning bid. Syndicate members are not individually allocated any takedown on sales they make during this presale period. Instead, the total takedown fee is allocated to syndicate members based on their allocated share of the issue, not on which made the particular sale.
Once the order period begins, the next orders of priority are generally established in the following sequence: group net orders, designated orders, and member takedown orders.
Group net orders are those made by the syndicate at the public offering price during the order period, the hours immediately after issuance (or immediately before with a negotiated sale). These are sales for which all members receive the takedown fee based on their allocation or retention. The identity of the investor that makes a group