7.1.4. The Syndicate
An underwriting syndicate serves two purposes: to help market the offering, and to spread out the risk so that if the offering sells poorly, the lead underwriter will suffer less of a loss. Syndicates are typically associated with firm commitments, since a best-efforts commitment does not obligate an underwriter to purchase unsold shares.
The syndicate is governed by a document called the Agreement Among Underwriters (AAU), which is just what it sounds like: an agreement between the underwriters that defines their relationship to one another. The AAU, sometimes called the purchase group agreement or syndicate contract, has several components. Among other things, a typical AAU (1) describes expectations of the offering generally and identifies the lead underwriter and any co-managers; (2) gives the lead underwriter broad authority to enter into agreements with the issuer, to negotiate with the issuer to set the offering price and the underwriting spread, to make stabilizing bids, to establish a selling group, and generally to exercise judgment on behalf of the syndicate; (3) sets forth the allocations of shares to, and proportionate liability of, each underwriter; (4) states the compensation for the lead underwriter and the syndicate members; (5) and specifies the length of the syndicate’s existence. The AAU also includes a clause requiring all underwriters to abide by the terms of the AAU and by certain price and trading restrictions. Like the UA, the AAU must contain the public offering price (or its formula) and therefore is n