Now that you understand the registration process and prospectus requirements, let's look at who actually does the work of distributing a new issue (the underwriting syndicate) and how they get paid.
What Is a Syndicate?
- A syndicate is a temporary group of underwriters formed to distribute a new issue
- The syndicate disbands after the offering is complete (typically 30 days or when all securities are sold)
- Purpose of the syndicate bid: to stabilize the offering price and facilitate orderly distribution
- The stabilizing bid is organized by the lead underwriter; syndicate members may participate in it, but only the lead manages and places it
What Are the Roles and Responsibilities in a Syndicate?
| Role | Function | Compensation |
|---|---|---|
| Lead (managing) underwriter | Conducts due diligence, forms syndicate, sets terms, manages bookbuilding, allocates shares, stabilizes price | Management fee + underwriting fee + selling concession (for shares it sells) |
| Syndicate members | Commit to purchase and sell a portion of the issue; share underwriting risk | Underwriting fee + selling concession (for shares they sell) |
| Selling group members | Sell shares to the public on a best-efforts basis; do NOT commit capital or assume underwriting risk | Selling concession only |
Exam Tip: Gotchas
Selling group members do NOT assume underwriting risk. They only earn the selling concession. The key difference: syndicate members commit capital and share risk, while selling group members only sell.
What Is the Underwriting Spread?
The underwriting spread (also called the gross spread) is the difference between the public offering price and the price paid to the issuer. It has three components:
| Component | Recipient | Typical Share of Spread |
|---|---|---|
| Management fee | Lead underwriter | ~20% |
| Underwriting fee (additional takedown) | Syndicate members | ~20% |
| Selling concession | Broker-dealers who sell shares | ~60% |
How Do You Calculate the Underwriting Spread?
- Total takedown = underwriting fee + selling concession (what a syndicate member earns per share it sells)
- Reallowance = a discount from the selling concession that may be offered to non-syndicate dealers who help with distribution
- The selling concession is the largest single component of the spread
How Do the Underwriting Fee and Selling Concession Attach?
The two pieces of a syndicate member's compensation are earned differently:
- The underwriting fee is earned on the member's entire allocation, whether or not that member is the one who sells the shares. It pays the member for committing capital and sharing the underwriting risk
- The selling concession follows the broker-dealer that actually sells the shares
- So a syndicate member that sells none of its allocation still earns the underwriting fee on it, while the selling concession on those shares goes to whoever sold them (another member or a selling-group dealer)
Exam Tip: Gotchas
The selling concession is the LARGEST component of the underwriting spread (roughly 60%), not the management fee. Also know that "total takedown" combines the underwriting fee and selling concession.
What Is the Corporate Financing Rule?
- Requires that underwriting compensation be fair and reasonable
- Underwriting terms and arrangements must be filed with FINRA within 3 business days of filing with the Securities and Exchange Commission (SEC) or another U.S. regulator
- If the offering makes no regulatory filing at all, the documents must still reach FINRA at least 15 business days before sales begin
- FINRA reviews the filing before the offering commences
- Items of value received by underwriters and related persons in connection with the offering count toward total compensation