Allotment

Allotment is the process by which a company, fund or token issuer assigns newly created securities or tokens to the people and institutions that applied for them. In a share offering, the issuer and its advisers decide who receives shares and how many, especially when demand exceeds the number available. Once allotted, the shares are issued, the buyers pay and their names are entered on the register of members.

Allotment happens in an initial public offering, in follow-on offerings and rights issues, in private placements and in many crypto token sales. It is closely linked to underwriting by investment banks, which manage the order book, and to company law rules on who may authorise new shares. The term also appears in other contexts, such as allotments of land or budget, but in finance it usually refers to securities.

Imagine a popular concert with 1,000 tickets and 5,000 people wanting them. The organiser has to decide who gets in: first come first served, a lottery, a few tickets each, or priority for members. Whatever method is chosen, the act of handing out the tickets is the allotment.

Share and token sales work the same way. When a hot offering is oversubscribed, many applicants receive fewer shares than they asked for, or none at all. When demand is weak, everyone may get the full amount and the organisers may still have some left over.

A typical IPO allotment follows these steps:

1. Applications. Investors submit orders during the offer period, set out in the prospectus.
2. Book-building. The lead bank collects institutional orders to gauge demand and set the price.
3. Basis of allotment. The issuer and bank decide how to divide shares between institutions and retail investors, and how to scale back oversubscribed orders.
4. Notification and payment. Applicants are told how many shares they received; refunds are made for amounts not allotted.
5. Issue and listing. Shares are credited to accounts and trading begins in the primary market and then on the exchange.

Directors must have authority to allot shares, often granted by shareholders and limited by the authorised share capital where that concept applies. Allotted shares increase the company's outstanding shares and change its capitalisation table.

• Pro rata. Every applicant receives the same percentage of what they requested.
• Ballot. A random draw decides who receives a fixed minimum lot, common for retail tranches in some Asian markets.
• Discretionary. Banks allocate to institutions they judge to be long-term holders.
• Priority tranches. Employees, existing shareholders or customers may receive a guaranteed portion.

Many IPOs include an over-allotment option, often called a greenshoe, which lets underwriters sell up to 15% more shares than planned and later buy them back in the market or exercise an option to receive them from the issuer. This helps stabilise the price in the weeks after listing.

Crypto token sales use similar ideas. In an initial coin offering, initial exchange offering or initial decentralized offering, projects often cap how much each participant can buy and use a whitelist of approved wallets. When demand exceeds a sale's hard cap, projects may run lotteries, give priority to holders of a launchpad's own token, or refund excess contributions pro rata. Allotted tokens are frequently subject to vesting, with only part released at launch and the rest over months, which affects how quickly buyers can sell.

Allotment decisions can be controversial. During the late 1990s technology boom, US regulators found that some banks had allocated shares in popular IPOs to favoured clients in exchange for business, a practice known as spinning, and others had required clients to buy more shares after listing, known as laddering. Rules now require firms to manage conflicts of interest and to document allocation policies. In crypto, critics point out that insiders, venture funds and bots often secure large allotments at low prices before public sales, leaving retail buyers with little. Disclosure of allotment rules, caps and vesting terms is one of the main safeguards.

Even transparent allotment cannot satisfy everyone in an oversubscribed sale, and scaling back orders encourages investors to inflate applications, which distorts demand signals. In undersubscribed sales, allotment may leave underwriters holding unsold shares. Investors should treat a successful allotment in a popular offering as the start, not the end, of their assessment, since prices after listing can move sharply in either direction.