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In this hypothetical example, IronBit Industries wants to sell 1 million shares. The per share offering price is
determined by the market, not by an investment banker.
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The auction engine calculates the offering price by tallying the bids, ranking them from highest to lowest, and
applying the lowest accepted bid price–in this case $10–to all successful bids. Ironbit winds up with $10 million for
its 1 million shares.
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Investors who bid higher than $10 a share receive all the shares they want at $10 per share. Everyone who bids
exactly $10 per share receives a fixed percentage of the number of shares they want based on the number of shares
remaining.
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In this case, after everyone who bids over $10 gets their allocation, there are still 225,000 shares which remain
unallocated. There are bids for 750,000 shares at exactly $10. Since 225,000 is 30% of 750,000, everyone who bids
at $10 receives 30% of the shares for which they bid.
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In certain instances, bids for more than a million shares may be accepted to insure that the company in fact sells the
million shares offered. In this example, this may result in an allocation to those who bid $10 of more than 30%.
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