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An underwriting group is formed by bankers to participate in a new security issue, providing a broader investor base and a profitable launch for the issuing corporation and underwriters. The group agrees to purchase a specified number of shares and resell them at the public offering price. A split syndicate format limits liability and provides a higher rate of return for 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 security issue. Generally, an underwriting group is formed under the direction of an investment bank or home banker. All bankers who choose to participate in the group agreement to purchase a specified number of shares and then resell them at the public offering price established by the members of the group.
There are several advantages to the corporation that arranges to launch a new offering through the auspices of an underwriting group. One of the main benefits is the extensive distribution network that the group can provide. By operating first as a buying pool and then as a reselling pool, the bankers who are part of the underwriting pool are able to provide a broader investor base than just one or two underwriters could manage. This means an enhanced opportunity for the initial public offering to generate a lot of attention and result in a quick sale of the shares bought 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 corporation, but also for the underwriters. Leveraging their collective resources, group bankers can provide greater visibility for the new offering and set a purchase price for the initial offering that will benefit everyone involved.
As part of the terms of the agreement between the underwriting group and the corporation issuing the new guarantee, the number and price of shares purchased 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 action item list to also be outlined in the agreement. This helps both the corporation and underwriting group members know exactly what actions each party will handle before, during, and after launch.
Many subscription groups choose to operate in a format known as a split syndicate. Essentially, this format helps limit the liability associated with the company to the amount of resources provided by each member of the group. Group members who contribute greater amounts of resources will incur more responsibility, but will also earn a higher rate of return for their efforts.
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