Understanding Indication of Interest (IOI): How They Work and Examples

Understanding Indication of Interest (IOI): How They Work and Examples

An Indication of Interest (IOI) is a non-binding expression that signals a buyer’s intent to purchase an asset. IOIs appear most often in two contexts: securities offerings (especially before initial public offerings, IPOs) and mergers & acquisitions (M&A). They help parties gauge interest and begin negotiations but do not create a legal obligation to transact.

IOIs in securities and IPOs

• What it is: A provisional expression of interest in buying shares while the security is still in registration and awaiting regulatory approval.
• Typical contents: security name, buy/sell indication, approximate number of shares, capacity (agency or principal), and an indicative price range.
• Legal and procedural notes:
• IOIs are non-binding because securities cannot legally be sold before registration is complete.
• Brokers must provide investors with a preliminary prospectus after an IOI is expressed.
• Placement is often first-come, first-served; an IOI does not guarantee allocation in a high-demand IPO.
• Actionable IOI: An IOI that contains sufficiently specific details (e.g., security symbol, size, and a price at or above the National Best Bid and Offer) such that it can be acted upon in trading systems.

IOIs in M&A

• Purpose: A written, non-binding letter from a prospective buyer signaling genuine interest in acquiring a company and outlining broad deal parameters.
• Common elements:
• Indicative price range (dollar range or multiples such as 3x–5x EBITDA)
• Preliminary transaction structure (asset vs. equity, mix of cash and equity, use of leverage)
• High-level conditions and approvals
• Management retention and post-transaction roles for equity owners
• Key due diligence items and an estimated timeline
• Estimated timeframe to close and any exclusivity requests
• Role: An IOI frames negotiations and sets expectations before a more detailed Letter of Intent (LOI) is drafted.

IOI vs. Letter of Intent (LOI)

• IOI: Informal, broad, non-binding; used to express interest and begin negotiations.
• LOI: More detailed and structured; still often non-binding on the ultimate transaction terms but typically includes stronger commitments (e.g., exclusivity periods, more precise price and structure) and sets the basis for definitive agreements.
• Sequence: IOI → negotiation → LOI → detailed due diligence → definitive agreement.

Example (real-world, summarized)

In 2008, a CEO submitted an IOI proposing an all-cash acquisition of a target company. The IOI:
– Stated a per-share purchase price and all-cash commitment
– Proposed management employment agreements to retain key executives
– Requested a time-bound exclusivity period in exchange for the higher offer
– Listed estimated closing timing and several non-binding conditions, with a termination date for the IOI

This illustrates how IOIs communicate serious intent while reserving formal agreement and final terms for later stages.

Other practical points

• Cancellation: The buyer who submitted the IOI can cancel it; IOIs can also lapse automatically if not confirmed within a designated confirmation period.
• Natural IOI: An IOI initiated by a customer (rather than a firm) or by a firm representing customer interest; it reflects genuine client demand rather than a firm’s proprietary quote.
• Limitations: IOIs are informational and procedural tools—not commitments. They help market participants and counterparties assess interest and plan resources but do not bind parties to transact.

Key takeaways

• IOIs are non-binding expressions of interest used in both capital markets (especially pre-IPO) and M&A.
• In securities, IOIs signal intent to purchase during registration and do not guarantee allocation.
• In M&A, IOIs outline high-level valuation ranges, structure, and timelines and pave the way for a subsequent LOI.
• The LOI follows and typically contains more specific terms and potential exclusivity, but definitive legal obligations usually come later with final agreements.

Sources: U.S. Securities and Exchange Commission and FINRA guidance, and public M&A examples.