Underwrite
A process whereby investment bankers (underwriters) buy a new issue of securities from the issuing corporation or government entity and resell them to the public. The underwriter makes a profit from the underwriting spread–the difference between the price paid to the issuer and the public offering price. Underwriters usually form an underwriting group–also called “purchase group” or a “syndicate” to limit risk, assure successful distribution of the issue, and to obtain capital to buy the issue. The syndicate works under an underwriting agreement–referred to as a syndicate contract or a purchase group contract. The lead underwriter, also known as “managing underwriter”, “syndicate manager”, is usually the originating investment banker–the firm that worked with the issuer to plan the issue and prepare the registration materials to be filed with the SEC. The manager, as agent for the group, signs the underwriting agreement with the issuer. The agreement sets forth the conditions of the arrangement and the responsibilities of both parties. The manager may select a selling group, consisting of the underwriters and dealers, to aid in distribution of the issue. Customarily, “underwrite” is properly used only in a firm commitment underwriting where the securities are purchased outright from the issuer. Other investment banking arrangements to which the term is applied are Best Effort, All or None, and Standby Commitments; in each of these, the risks are shared between the issuer and the investment banker. There are two basic methods by which underwriters are chosen by issuers and underwriting spreads are determined: Negotiated Underwriting and Competitive Bid underwriting. Generally, the negotiated method is used in corporate equity issues and corporate debt issues. The competitive bidding method is used by municipalities and public utilities.
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