Book-building matches price with demand more accurately
The principle behind book-building is that investors are given the opportunity to indicate their demand for shares before the price is fixed and prior to finalisation of the prospectus. Underwriters would "build a book" by obtaining non-binding expressions of interest from potential investors in which they indicated the likely number of shares and the price at which they are prepared to accept. At the end of the marketing or "book-building" period, the overall size of the offer and the price at which shares would be sold were determined, having regard to the demand indicated during the book-building process, allocations to investors are made and underwriters enter into binding commitments to underwrite the sale of shares allocated to investors.
In this structure, underwriting does not occur until the final few hours of the book-building period just prior to the announcement of trading and immediately after the size and the issue price of the offer have been finalised. As the price is fixed on the basis of investor demand and as the duration between the time when the price is fixed and when trading commences is short, theoretically, the likelihood of the issue price being fixed at a great disparity to the actual trading price would be minimised - hence, better price discovery and price matches demand more accurately.