Page 178 - Initial Public Offering - An Introduction to IPO on Wall Street

arrangement would usually come into play. All unsold shares will be returned to the issuer in
this type of underwriting arrangement.

As the name implies, the underwriter simply agrees to make their best effort to sell securities.
The agreement eliminates the liability for the underwriter since they are not held responsible
for any unsold shares. The underwriter can also absolutely cancel the issue. For its services,
the underwriter earns a fixed amount which it will lose if it opts to terminate the issue.

On the other hand, in a standby underwriting commitment, the underwriter assumes a greater
risk by committing to buy all the shares that are left unsold after the securities are sold to the
public. Since the underwriter may have to incur a loss in a standby underwriting agreement, it
is generally less preferred than best-efforts.

As seen above, three different types of underwriting commitments can be made for an IPO.
IPO underwriters include some of the biggest names in banking and investment worldwide.
To name a few, they include Merrill Lynch, JPMorgan, and Credit Suisse.

More than one underwriter is often involved in an IPO, with one lead underwriter in the most
central role. The leader is often referred to as the “bookrunner”. The other underwriters are
"co-managers" with smaller shares of liability and smaller proportions of profits for the
performance of the IPO.

One of the primary responsibilities of an underwriter is selling the stock of the issuer to the
public. The company’s stock is sold on a stock exchange or stock market. How these stock
markets function and what are their different types are discussed next.

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