Series 79: 8.5.1. The Underwriting Spread

Taken from our Series 79 Online Guide

8.5.1. The Underwriting Spread

The underwriting spread as a whole is sometimes referred to as the gross spread. The gross spread is often about 7% of total proceeds. While this is more of a guideline than a firm rule, a spread that is not “fair and reasonable” will likely result in FINRA blocking the UA from taking effect. (This FINRA review of the UA is described in more detail the next section.) The gross spread is typically divided into three primary components: the management fee, the underwriting fee, and the selling concession. The amount and source of a syndicate member’s compensation depends on its role in the syndicate. The most common arrangement is a 20/20/60 split as described in the following table.

Typical Components of the Underwriting Spread

Fee Component

Percentage of Spread

Goes to

Management Fee

20%

Lead underwriter and co-managers (if any)

Underwriting Fee

20%

Underwriters on pro rata basis; deal expenses deducted from underwriting fee

Selling Concession

60%

Underwriters and selling group members who sell shares to investors

Example: The public offering price for Typical, Inc. is set at $20 per share, with a 7% gross spread and a 20/20/60 split. The gross spread is therefore $1.40 ($20 x 0.07). This makes the issuer’s proceeds $18.60 ($20 – $1.40). The management fee is $0.28 ($1.40 x 0.20), and so is the underwriting fee. The selling concession is $0.84 ($1.40 x 0.60).

The management fee, also called the managing underwriter’s fee, compensates the manager for doing the heavy lifting: completing the copious paperwork, formu

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