What is a Lead Underwriter?
In the securities industry a lead underwriter is a company, usually an, that helps companies introduce their new securities into the by leading a of banks to the securities.
How Does a Lead Underwriter Work?
When a company decides it wants to
To begin the process, the underwriter and the first determine the kind of the issuer needs. Sometimes the issuer wants to sell via an . In this case, the proceeds go back to the company, but other offerings such as secondary offerings funnel the proceeds to a shareholder who is selling some or all of his or her .
After determining the offering structure, the underwriter usually assembles what is called a to get help managing the minutiae (and risk) of particularly large offerings. A syndicate is a group of other banks and brokerage firms that commit to sell a certain percentage of the offering (this is called a guaranteed offering because the underwriters agree to pay the issuer for 100% of the shares, even if they can’t sell them all). The lead is the underwriter, which has the responsibility for assembling and managing the syndicate throughout the process. That means it is primarily responsible for assembling the " force" that sell the securities.
After the syndicate is assembled, the lead underwriter usually writes and files an SEC Form S-1, which is also called a prospectus. The requires the prospectus to fully disclose all material information about the issuer, including a description of the issuer’s business, the name and addresses of key company officers, the salaries and business histories of each officer, the ownership positions of each officer, the company’s , an explanation of how it use the proceeds from the offering, and descriptions of any legal proceedings the company is involved in.
Prospectus in hand, the underwriter then sets to selling the securities. This usually involves a road show, which is a series of presentations made by the underwriter and the issuer’s and CFO to institutions (pension plans, managers, etc.) across the country. The presentation gives potential buyers the chance to ask the management team questions. If the buyers like the offering, they make a non-binding commitment to purchase, called a subscription. Because there may not be a firm at the time, purchasers usually subscribe for a certain number of shares. This process lets the lead underwriter gauge the demand for the offering (called “indications of interest”) and determine whether the contemplated price is fair.
Determining the final offering price is one of the lead underwriter’s biggest responsibilities for two reasons. First, the price determines the size of the proceeds to the issuer. Second, it determines how easily the underwriter can sell the securities to buyers. Thus, the issuer and the lead underwriter work closely together to determine the price. Once the issuer and the lead underwriter agree on how to price the securities and the SEC has made the registration statement effective, the underwriters the subscribers to confirm their orders. If the demand is particularly high, the underwriters and issuer might raise the price and reconfirm this with all the subscribers.
Once the syndicate is sure it sell all of the shares in the offering, it closes the offering. The syndicate purchases all the shares from the company (if the offering is a guaranteed offering), with the lead underwriter typically buying the largest portion. The issuer receives the proceeds minus the fees. The underwriters then sell the shares to the subscribers at the offering price.
Although the underwriters influence the initial price of the securities, once the subscribers begin selling, the free-market forces of supply and demand dictate the price. The lead underwriter usually maintains a secondary in the securities they issue, which means they agree to purchase or sell securities out of their own inventories in order to keep the price of the securities from swinging wildly.
Why Does a Lead Underwriter Matter?
Lead underwriters grease the skids for bringing securities to underwriter takes a $1-per-share fee (the lead underwriter this with the but gets a larger portion of that $1). Making a in the securities also generates for underwriters.
As we mentioned earlier, underwriters take on considerable risk, and the lead underwriters especially so. Not only must they advise a client about matters large and small throughout the process, they relieve the issuer of the risk of trying to sell all the at the price.