Undersubscription
If the issue is not fully subscribed after the order period, the underwriters’ agreement may authorize the managing underwriter to lower the price and offer a new order period. The underwriter may also reallocate the unsold issue to the syndicate members and leave the price unchanged, or it may leave its delinquent members on their own to cut their losses as best they can. Its choices are stipulated in the contract.
When the syndicate is formed, the underwriters agree to distribute the issue using one of two types of accounts. The underwriters’ agreement may distribute bonds under a divided account or an undivided account. With an undivided account, also known as an Eastern account, each underwriter is given an initial allotment of the issue to sell. After the order period has ended, if some members have been unable to sell their full allotment, the remaining bonds will be redistributed to every underwriter according to their proportionate share of the total issue. An underwriter’s liability does not necessarily end with the successful sale of its own initial allocation.
With a divided account, or Western account, each underwriter is responsible only for its own allocated amount. If an underwriter is unable to sell its allotted amount