12.4  Underwriting Compensation

The spread of a public offering is the difference between the public offering price (the price at which the shares are sold to investors) and the amount the underwriter paid the issuer. Said another way, it is the total proceeds less the issuer’s proceeds. Several risk-related factors may influence the size of the underwriting spread, including the size and perceived financial stability of the issuer; type of security (stocks, bonds, junior, senior); and number and size of underwriters. The spread is often about 7% of the total proceeds.

spread = total proceeds – issuer’s proceeds

therefore,

total proceeds – spread = issuer’s proceeds

The spread is also referred to as the underwriting proceeds. The spread can be divided into three main components.

The managing underwriter’s fee is the amount the managing underwriter earns for managing the offering. Typically, the managing underwriter’s fee is around 20% of the spread. It is expressed as a dollar amount per share (e.g., $0.28 on every $20 share). It is paid on every share in the offering, whether sold by the underwriter or not.

The second component is called the underwriting fee. It is the amount the syndicate members are paid for assuming the risk of unsold shares. It is typically a