Series 24: 4.1.7. Underwriting Compensation

Taken from our Series 24 Online Guide

4.1.7. Underwriting Compensation

The underwriting spread of a public offering is the difference between the public offering price (the price at which shares are sold to investors) and underwriter’s discounted price; 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); and number and size of underwriters. The spread is often about 7% of total proceeds. The spread is also referred to as the underwriting proceeds or the gross spread, because it is the underwriting syndicate’s gross profit before taking its expenses into account.

spread = total proceeds – issuer’s proceeds

therefore,

total proceeds – spread = issuer’s proceeds

The spread can be divided into three main components.

The managing underwriter’s fee is the amount the managing underwriter earns to manage the offering. Typically, the managing underwriter’s fee is around 20% of the spread. It is expressed as a dollar amount per share, and it is paid on every share in the offering, whether sold by the underwriter or not.

The second component of the spread is the underwriting fee. It is the amoun

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