Editor’s note: This article was first published in February 2012. It describes the procedure for Spanish public offerings as of 2012, including mandate and application periods, retail, employee and institutional tranches, and pricing. Spanish IPO practice and regulation have changed since.
Public offerings can be divided into two types. On the one hand there’s the public subscription offer (Oferta Pública de Suscripción, OPS), and on the other the public sale offer (Oferta Pública de Venta, OPV).
What is a public subscription offer (OPS)?
A public subscription offer (OPS) is a transaction in which a company offers the public newly issued shares, put into circulation through a capital increase. Its main purpose would be to raise funds to finance the company.
What is a public sale offer (OPV)?
A public sale offer (OPV) is a transaction in which one or more shareholders put their shares up for sale. In this case, the company’s share capital doesn’t change. As the saying goes, it simply changes hands, in whole or in part. That’s the theory; in practice, for the investor there’s no difference at all between an OPV and an OPS.
Who can take part, and how to buy shares in a public offering (OPS/OPV)
Public offerings authorized in Spain are aimed at individuals and/or legal entities resident in Spain, and at non-residents who are nationals of a European Union member state or residents of Iceland, Norway or the Principality of Andorra.
To take part in a public offering, we have to do so through what are known as mandates (mandatos) and applications (solicitudes).
Mandate
This is the order placed between the opening of the subscription period and the day the maximum retail price is set. A mandate can be revoked, but once the revocation period is over it becomes a firm order. A mandate cannot be partially revoked. Mandates take priority over applications.
Application
This is the order placed from the day after the mandate period ends until the last day of the OPV/OPS processing period. Applications are irrevocable.
Since mandates take priority over applications, if the orders based on mandates exceed the shares allocated to a particular tranche (retail or employees), applications are no longer taken into account.
Prices in a public offering
To give potential investors a reference when placing their orders, companies set a price range. This range is merely indicative, so it isn’t binding, and it is set just before the OPV/OPS period begins.
Maximum retail price
- It’s the most that retail investors will pay for each share allotted to them.
- It’s the price used for pro rata allocation, if that becomes necessary.
- It’s set after the mandate period and may fall outside the indicative price range.
Retail price
This is the one that matters most to investors, since shares are allotted on the basis of it. It will be the lower of these two prices:
- The maximum retail price
- The price set for the qualified investor tranche (the institutional price)
Institutional price
This is the price set for qualified investors, and it could be higher than the maximum retail price.
What are the tranches in a public offering?
The tranches into which a public offering is divided are based on the type of investor.
The total volume of shares in the offering is split into three tranches, each allocated a specific percentage of the shares:
- Retail tranche: small investors, meaning individuals (including minors acting through a representative) and legal entities.
- Employee tranche: for employees of the company making the offering.
- Qualified or institutional investor tranche: large investors, broker-dealers and securities firms, investment funds, pension funds…
The last step: pro rata allocation
Pro rata allocation (prorrateo) is the method used to distribute the shares in the retail, employee and institutional tranches, although it only happens when purchase orders (mandates and applications) exceed the volume allocated to a particular tranche.
In a pro rata allocation, mandates take precedence over applications. This means that the shares earmarked for a tranche go first to filling mandates, and only once those have been filled in full do any remaining shares go to applications.
Various situations can arise when an offering goes to pro rata allocation, but that would take another article, and frankly these are technical details the average investor doesn’t need to know. To buy shares in a public offering in Spain, you can do it yourself or through practically any bank (broker), which will guide you through the process.
Further reading
- Investing in the stock market: a beginner’s guide
- The best investors in history and their returns
- 3 investment strategies for a volatile market
Featured image: Zarateman, CC0 1.0, via Wikimedia Commons.
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