Plan of distribution: Overview, definition, and example
What is a plan of distribution?
A plan of distribution is a strategy or framework used to outline how the proceeds from the sale of securities (such as stocks, bonds, or other financial instruments) will be allocated among the parties involved in the offering. This plan is typically part of a larger document such as a prospectus or offering memorandum and specifies how the securities will be sold, who will be involved in the distribution process (e.g., underwriters, brokers), and the terms under which the sale will occur. It can also detail the pricing, allocation of securities, and the timing of the offering.
For example, in a public offering of shares, the plan of distribution would describe how the shares are allocated to different investors, the underwriting process, and any fees or commissions to be paid to intermediaries like brokers or underwriters.
Why is a plan of distribution important?
A plan of distribution is important because it provides transparency and clarity about how a securities offering will be executed. By laying out the distribution strategy, the plan helps manage expectations for all parties involved—such as investors, underwriters, and the issuer. It also ensures compliance with securities laws and regulations, as the allocation and pricing of the securities must meet certain legal requirements.
For businesses, having a detailed plan of distribution helps ensure that the offering is structured properly and that securities are sold efficiently and equitably. For investors, it provides insight into how the offering will be managed and how they can participate in the purchase of securities.
Understanding a plan of distribution through an example
Imagine a company is launching an initial public offering (IPO) to raise capital. The plan of distribution for the IPO would outline the process by which the company’s shares will be sold to the public. This plan might specify that 10 million shares will be offered, with 6 million shares being allocated to institutional investors and the remaining 4 million shares available to individual retail investors. The plan would also detail how the underwriters will purchase the shares from the company, set the price range, and allocate the securities among investors.
In another example, a company issues bonds to raise funds. The plan of distribution would specify how the bonds will be sold (e.g., via public offering or private placement), the pricing of the bonds, and the intermediaries involved in the distribution, such as investment banks or bond dealers.
An example of a plan of distribution clause
Here’s how a plan of distribution clause might appear in an offering document:
“The securities offered by this Prospectus will be distributed through a group of underwriters led by [Underwriter Name]. The securities will be offered at a public offering price of $X per share. The underwriters have agreed to purchase the securities from the Issuer for $X per share, and the proceeds of the offering will be allocated to the Issuer as described in Section [X] of this Prospectus. The allocation of shares will be made on a pro-rata basis, with institutional investors receiving [X]% of the offering and retail investors receiving [X]%.”
Conclusion
A plan of distribution is a critical element of a securities offering, providing a clear roadmap for how the securities will be sold, priced, and allocated among investors. It ensures that all parties understand their roles in the transaction and helps maintain transparency and fairness throughout the process.For businesses, a well-defined plan of distribution helps structure the offering and ensures compliance with relevant securities laws. For investors, it provides clarity on how the offering will be managed and how they can participate, helping to foster trust and confidence in the process.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.