Page 69 - Initial Public Offering - An Introduction to IPO on Wall Street

A firm's size and reach and its offering will, in part, decide the capacity of the appointed
underwriter.

Of course, a business's professional partnership with its underwriter is mutually advantageous.
In a number of cases, an underwriter makes money from an offering. The following are some
of these cases:

 Discount or commission. For the large number of IPOs, this ranges about six to seven
percent of the income earned, but may be as high as ten percent for more challenging or
smaller offerings or as little as one to two percent for broad global offerings in a competitive
environment;
 The privilege to underwrite future stock offerings of the business;
 Non-accountable expense allowance. This normal practice requires underwriters to charge
a business a sum that does not surpass three percent of gross sales;
 Other payment, such as options in certain circumstances to buy stock; and
 Overallotments, as explained below

Although these things may seem to encourage an underwriter to demand quite a few payments,
the Financial Industry Regulatory Authority ( FINRA) controls and checks for fairness of the
total compensation of underwriters (both direct and indirect) before the offering is allowed to
proceed. Additionally, an evaluation by state regulators of underwriters' compensation is
required by Blue Sky laws.

The agreement of the underwriter usually comes in two basic types. The first is a "firm promise"
where the underwriters agree to purchase and resell all the stock sold in the IPO to the public.
This deal gives the organization the most protection because the owners know that the full
purchase price of the issue will be paid by them. The second type is "under a best efforts
commitment," where the underwriter employs his or her best efforts to sell the stock but has no
obligation to buy the stock if part of the issue remains unsold.
These two basic arrangements have variations. They have a "all-or-none" pledge, which is an
amendment to the agreement on "best-efforts." All of the shares must be sold by the underwriter
in this pledge or the entire issue is scrapped (at significant expense to the business). The
underwriter allows the selling of a certain part of the issue (typically two-thirds) in a partial
"all-or-none" arrangement for the "best efforts" to remain in place on the rest of the issue.
4.4.5 Capital Markets Advisor

Since the great recession, businesses have been recruiting capital market consultants more

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