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

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An indication of interest (IOI) is a non-binding statement from a potential buyer that it wants to buy a security or take part in a transaction, given before any binding commitment exists. IOIs appear in three settings: investors signaling demand for shares in a registered offering such as an IPO, traders advertising buying or selling interest to other market participants, and buyers in mergers and acquisitions (M&A) telling a seller they want to acquire the company and roughly what they would pay. An IOI starts a conversation. It does not close a deal.

What an indication of interest means

The phrase describes the buyer’s position: interested, but not committed. In a securities offering, an IOI typically names the security, the type of transaction and the number of shares the investor might buy. In an acquisition, it is a written letter from the prospective buyer to the seller (often delivered through the seller’s investment banker) that sets out a price range and the conditions under which the buyer would proceed.

The non-binding nature serves both sides. The buyer signals seriousness without legal exposure, and the seller or issuer gauges demand before committing to one party.

How IOIs work in IPOs and registered offerings

Under the Securities Act of 1933, a company offering securities to the public in the U.S. must file a registration statement with the Securities and Exchange Commission, and the securities cannot be sold until the SEC declares it effective. Investors can still express interest during that period, and that expression is the IOI. Because a sale during registration would be illegal, the IOI cannot be an order to buy. It becomes a purchase only after the offering is priced, the investor confirms and shares are allocated.

Once an investor indicates interest, the broker must provide a preliminary prospectus, often called a “red herring,” describing the company’s business, finances, risks and proposed offering terms. The final price is usually left blank or shown as a range.

An IOI does not secure shares. Some brokers that offer IPO access handle indications in the order received, but in a heavily oversubscribed deal the allocation may be small or zero.

Hypothetical example: An investor enters an IOI for 200 shares of an upcoming IPO with an expected price range of $18 to $21. If the deal prices at $20, the maximum cost would be $4,000. The investor reconfirms, but because the offering is oversubscribed, the broker allocates 50 shares, or $1,000. Until that confirmation and allocation, the investor owed nothing.

IOIs in trading: actionable and natural interest

Outside IPOs, broker-dealers and trading firms send IOIs electronically, through their own systems or dedicated trading platforms, to advertise proprietary or client trading interest to other market participants. An IOI here contains one or more of these elements, and the level of detail determines how it is treated:

• The security name or symbol
• Whether the participant is buying or selling
• The number of shares or the capacity in which the firm is acting
• The price

Actionable IOI

An actionable IOI is specific enough to act on. It includes the symbol, side, size and a price at or better than the National Best Bid and Offer (NBBO), the best available bid and ask across exchanges. A recipient can reasonably expect a trade if it responds, so it behaves much like a quote.

Natural IOI

A natural IOI is one that originates with a customer rather than with the firm’s own appetite. FINRA describes it as customer interest a firm represents on an agency basis, or proprietary interest established to facilitate a customer order or to execute one on a riskless principal basis. The label matters to recipients: a natural IOI points to a real buyer or seller behind the message, which is useful information when looking for the other side of a large block trade.

IOIs in M&A

In an acquisition, the IOI is usually the buyer’s first formal written step. In a typical sell-side process, the seller’s adviser circulates information to potential buyers, interested parties submit IOIs, the seller narrows the field, and the remaining bidders get deeper access before negotiating a letter of intent.

An M&A IOI is brief, but it should give the seller a valuation guide and outline the conditions for completing a deal. Common elements include:

• Price range, stated as a dollar range (for example, $10 million to $15 million) or as a multiple of earnings such as 3x to 5x EBITDA
• Transaction structure, such as an asset or equity purchase, cash or stock consideration, and any use of leverage
• Management and owner roles, including a retention plan and what the current owners do after closing
• Due diligence, listing the main items the buyer needs and a rough timeline
• Timing, with an estimated date to close

Worked example: turning a multiple into a price

Hypothetical: A buyer’s IOI offers 3x to 5x EBITDA for a business with $3 million in trailing EBITDA.

• Low end: 3 × $3 million = $9 million
• High end: 5 × $3 million = $15 million

The seller now knows the buyer values the business at $9 million to $15 million, based on two assumptions. First, both sides must accept the EBITDA figure; buyers often adjust it during diligence, which moves the whole range. Second, a multiple of EBITDA usually describes enterprise value, so the cash the owners receive depends on how debt and cash are treated at closing. Buyers often build the range from a discounted cash flow model or comparable deals.

A wide range costs the buyer little, which is why sellers compare IOIs on the low end and on the conditions attached, not only on the headline figure.

IOI vs. letter of intent (LOI)

Both are generally non-binding on the main deal terms, but they sit at different stages:

• Timing: The IOI comes first and opens negotiations. The LOI follows once the parties have negotiated.
• Detail: An IOI gives value ranges and general terms. An LOI sets out specific price, structure and conditions and serves as the basis for the definitive purchase agreement.
• Exclusivity: Signing an LOI commonly commits the seller to an exclusive period in which it cannot negotiate with other buyers. An IOI may request exclusivity, but the seller grants it only by agreeing.
• Commitment: An LOI signals a firmer intention to complete the deal.

Either party can end talks at either stage. Specific clauses, such as confidentiality, exclusivity or the document’s expiry date, can be written as binding even when the deal terms are not.

Real-world example: Blackbaud and Kintera

A revised IOI filed with the SEC shows the format in practice. In May 2008, Blackbaud CEO Marc Chardon sent Kintera president and CEO Richard LaBarbera an IOI proposing to acquire 100% of Kintera, asking for a time-limited exclusive negotiating period in return for a higher all-cash offer. The letter covered:

• A purchase price of $1.12 per share
• A commitment to an all-cash offer
• Required approvals and closing conditions
• A management retention plan, offering employment agreements to Kintera’s CEO and some executives and senior managers
• An estimated closing date of July 1, 2008

Under the exclusivity terms, Kintera could not discuss or agree to an acquisition with third parties until a purchase agreement was signed or terminated. The letter closed by listing the provisions that were binding, including the IOI’s termination date of May 21, 2008, and stating that the IOI was a non-binding precursor to an agreement.

Who can cancel an IOI

The party that submitted the IOI can withdraw it. In an IPO, brokers generally ask investors to confirm once the deal is priced, and some platforms cancel an indication left unconfirmed past the confirmation window. In M&A, either side can end discussions, and many letters lapse at a stated expiry date.

Limitations

• No guarantee: An IPO indication may receive a partial allocation or none, and an M&A IOI may be outbid or rejected.
• Limited information: IOIs are formed before full disclosure or due diligence, so final terms, and ranges built on unverified earnings, can change materially.
• Signal quality varies: In trading, an IOI without price or size says less than an actionable one, and a non-natural IOI may reflect the firm’s own position rather than a customer’s.

FAQs

The Bottom Line

IPO investors, block traders and business sellers all use IOIs to judge demand before anyone is bound. Treat an IOI as an opening signal: an IPO indication may yield few or no shares, and an M&A range can shift once diligence adjusts earnings. Sellers should weigh the low end of a range and the attached conditions alongside the headline price, and save firmer commitments for the letter of intent.