What Is an Allotment? In business, an allotment refers to the allocation of shares of a company to intended shareholders who have applied to receive such shares. A company offers its shares to the masses via an allotment to determine which entities receive what shares. Allotment in an IPO Companies launch IPOs as a means of issuing stock to potential investors. When a company goes public, the previous private share ownership converts to public ownership, and the current private shareholders’ shares become worth the public trading price. The process of issuing shares to the public involves entities known as underwriters. Companies usually opt for two or more underwriters. The participating firms estimate demand before they launch the IPO. While stock markets offer an efficient mechanism to determine prices, it is impossible to predict all conditions. It means an allotment process can often be complex. If demand for the company stock turns out to be higher, it is known as an oversubscription. It means the allotted shares are lower than the amount requested. This oversubscription causes the price of shares to spike shortly after the start of the IPO. If demand is lower than predicted, it means there was an undersubscription and it causes the share prices to fall once the IPO starts. This means that investors do not get their desired allotment and that they need to pay a lower price than what was previously announced. How Do Allotments Work in the Crypto World? In crypto, something like a share allotment often takes place via an initial coin offering (ICO) or the popular initial DEX offering (IDO). During an ICO, investors are given tokens instead of shares at a set price. The major difference between an ICO and IPO is that the latter has legal backing while an ICO often depends on the trust of the investors in the project. This is because an ICO is unregulated and often stands on shaky legal grounds in case things go wrong. Most companies and investors prefer IDOs, which are held via a DEX such as Uniswap.
February 11, 2023
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