An underwriting group is a collection of bankers who purchase and sell a certain amount of shares at the public offer price. It provides a larger investor base and ensures profitability for both the issuing company and underwriters. The agreement outlines the number and price of shares acquired, the initial public offering price, and a timeline of actions. The split syndicate format limits liability and rewards those who contribute more resources.
Underwriting groups are a collection of bankers who have come together for the express purpose of participating in a new issue of securities. Typically, an underwriting group is formed under the direction of an investment bank or parent banker. All bankers who choose to participate in the group agreement undertake to purchase a certain amount of shares and then sell them at the public offer price set by the members of the group.
There are several benefits to the company organizing the launch of a new offering through the auspices of an underwriting group. One of the main advantages is the extensive distribution network that the group can provide. By functioning first as a buying group and then as a resale group, the bankers who are part of the underwriting group can provide a larger investor base than just one or two underwriters could handle. This means a greater opportunity for the initial public offering to generate a lot of attention and lead to the quick sale of the shares purchased by the underwriters.
For investment banks that choose to participate in this underwriting venture, there is also an opportunity to pool their resources and ensure that the launch of the new security is profitable not only for the issuing company, but also for the underwriters. By drawing on their collective resources, group bankers can provide greater visibility to the new offering and set a purchase price for the initial offering that will benefit all involved.
As part of the agreement between the guarantee group and the company issuing the new security, the number and price of shares acquired by the group will be defined. At the same time, all interested parties will agree on the initial public offering price. It is not unusual for a timeline and a list of actions to also be outlined in the agreement. This helps both the company and underwriting group members know exactly what stocks each party will be handling before, during and after the launch.
Many subscription groups choose to work with a format known as a split syndicate. In essence, this format helps limit the liability associated with the enterprise to the amount of resources contributed by each member of the group. Group members who contribute larger amounts of resources will have greater responsibilities, but will also realize a higher rate of return for their efforts.
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