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IPO underwriters are financial intermediaries, generally investment banks that specialize in the issuance and allocation of securities. Underwriters facilitate the company in the whole process of releasing its IPO by performing multiple roles simultaneously. These roles vary depending on the type of agreement that is signed between the company and the underwriter.
Many times depending on the size of the IPO, there can be multiple underwriters (called a syndicate) to diversify and distribute the risk of the IPO amongst the syndicate members.
The following are the key roles played by an underwriter:
Providing guarantee
There are many types of underwriter agreements that companies can sign with their underwriter. Most commonly underwriter agreements tend to guarantee that a minimum number of shares offered will be sold. Alternatively, underwriters guarantee a certain revenue by buying a proportion of shares themselves and further selling them to the public.
However, in some agreements such as a ‘best effort agreement’ underwriters do not guarantee the sale of any particular number of shares but strive to sell as many as they can.
Ensuring compliance & maximum profit
Underwriters render their expert advice to the companies during the valuation of securities. Underwriters try to ensure that the shares are neither undervalued (which leads to forgone profit) nor are they overvalued (which may lead to failure of the IPO).
They also have the responsibility to ensure due diligence and make certain that the IPO complies with all the requirements of the regulatory body like submitting fees on time, releasing necessary data for the public’s perusal, etc.
Publicizing the IPO
The underwriter publicizes the IPO by contacting a number of prospective buyers and mutual funds to attract investors and maximize the number of shares sold. In addition, underwriters also launch a marketing campaign for their companies by drafting a ‘red herring prospectus’.
Underwriting is one of the most important factors in the success or failure of an IPO. The underwriter plays a critical role in the whole process and carries a great responsibility. Because of the significance of this role and the complex execution process, many companies choose their underwriters on the basis of their reputation and prestige.
