Ch 2 Deck 4 Flashcards
Underwriting fee is typically
around 20% of spread
Underwriting expenses are typically
divided among the underwriters on a pro rata basis
Profit to the dealer that sells to the public in an offering
Concession
Members of the selling group are compensated by
Concessions
Concessions are typically in the amount of
around 60% of spread
compensation earned by a firm that is not a member of the syndicate is called
Reallowance
Reallowance is often in the amount of
one half of concession
If selling group members sell part of their allotment to a non-syndicate-member firm, that firm must sell
the shares to the public at the public offering price
Terms if the syndicate is unable to sell all the shares in an IPO are described in
Agreement among underwriters
Western walks
syndicate only responsible for shares they are allotted - they can walk away after they sell those
Eastern eats
syndicate members are responsible for unsold shares on a pro-rata basis
Larger offerings tend to have underwriting spreads that are
lower than smaller offerings
Lower risk offerings tend to have underwriting spreads that are
lower than higher risk offerings
Firm commitment offerings tend to have underwriting spreads that are
higher than best efforts offerings
Offerings that require more marketing tend to have underwriting spreads that are
higher than those that require less marketing
Under NASD Rule 11880 syndicate accounts must be closed
within 90 days after the syndicate settlement date
No later than the final settlement, each member of selling syndicate
must receive an itemized statement of syndicate expenses
syndicate expenses are considered
underwriting expenses
FINRA Rule 5110 says underwriter’s fees must be
fair and reasonable
The following are considered underwriting compensation
–Discounts/commissions
–Reimbursements
–Finder’s fees
–Advisory fees
–Securities (common and preferred stock, options, warrants, debt securities)
–Fees of a Qualified Independent Underwriter
The following are NOT considered underwriting compensation
Not Underwriter Compensation
- -Expenses born by the issuer
- -Registration fees
- Blue Sky Fees
- Printing fees
When an underwriter sells more shares than it has registered and committed to purchase from the issuer it is called
overallotment
Overallotment allows the underwriter to
have some post-issue control
make more money
If a stock price declines, an underwriter can use an overallotment to
cover short position by buying shares in the market at the lower price and pocket the difference
If a stock price rises, an underwriter can use an overallotment to
exercise the Green shoe option
