Underwriter Syndicate (IPO) - Explained
What is an Underwriter Syndicate?
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Table of ContentsWhat is an Underwriter Syndicate?How does an Underwriter Syndicate Work? What is the purpose of an Underwriter Syndicate?Academic Research on Underwriter Syndicates
What is an Underwriter Syndicate?
Before we explain what an underwriter syndicate is, it is important to know who an underwriter is and what a syndicate is. Ordinarily, a syndicate refers to individuals with a shared interest that come together or form an alliance to promote the shared interest.
An underwriter is a person, a company or a financial institution that guarantees payment for unsold shares in the issuance of new stock. This entity takes all the risks attributable to the transaction. A group of financial institutions, individual brokers, and investment banks that some together with the aim of selling new offerings to buyers (investors) is an underwriter syndicate.
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How does an Underwriter Syndicate Work?
Usually, when there is a large new offerings of securities, underwriter syndicate is formed. This is because large offerings are difficult to handle by one underwriter. Many underwriters with a shared interest or a common goal from the underwriter syndicate. The leader of the underwriter syndicate is called a lead underwriter. The objective of an underwriter syndicate is to buy the new issue from the company and sell to interested investors. Risks involved in selling new offerings of equity is spread to all members of the syndicate, thereby helping to mitigate risk that each of them can face.
What is the purpose of an Underwriter Syndicate?
The main goal of an underwriter syndicate is to sell new issues of equity, hence, all members of the syndicate are obliged to do their part in achieving the goal. An underwriter syndicate is formed based on an agreement between participants, the obligations of the members as well as how stock and management fees are allocated are included in the agreement.
Usually, the lead underwriter takes more portion of the fees and underwriting spread when compared to other members. Either the SEC or FINRA regulates the issuance and sale of equities, hence, it is the responsibility of the lead underwriter to settle all regulatory issues with these commissions. Underwriter syndicate also help underwriters mitigate the risks attributable to the sale of newly issued equity or securities.
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