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What is a Lead Underwriter?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 27 August 2016
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    2003-2016
    Conjecture Corporation
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Lead underwriters are financial institutions that serves as the primary or lead director in the process of organizing an initial public offering of new stock, or a secondary offering for shares of stock that are already been traded on the public markets. In order to accomplish this task, the primary or lead underwriter will work with other institutions to establish a syndicate that takes on the task of organization the public offering, including the marketing of those shares to individual and institutional investors. Both the lead underwriter and other members of the syndicate are usually authorized to sell the shares to interested parties, working within the guidelines developed by the syndicate and enforced by the primary underwriter.

As part of the preparation for the stock offering, the lead underwriter normally has the task of evaluating the financial situation of the company that wishes to create and sell the shares of stock. Along with assessing the financials of the issuing company, the underwriter also looks closely at current market conditions. After completing the assessment, it is possible for the lead underwriter to determine the initial value of each share, and the quantity of shares that can reasonably be sold as part of the offering.

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As part of the underwriting process, the majority of shares are held by the lead underwriter, while the remaining partners in the syndicate have control of limited quantities of shares. In order to finance the overall process of the public offering, the syndicate normally receives a commission on each share that is sold. The amount of the commission will vary, based on regulations that apply in the country where the offering originates, with most syndicates receiving a commission of eight percent or less.

Assuming that the stock offering goes well and the shares are sold at a brisk pace, the lead underwriter stands to earn a substantial return for its efforts. However, there is always an element of risk involved. Should the stock offering fail to attract much attention from investors, the return generated from the effort may not be sufficient to cover the expenses incurred by the syndicate. This is one reason that the lead underwriter will look so closely at prevailing market conditions before the public offering is actually made. By properly evaluating the current mood of the marketplace and projecting the most likely future movement of the market, it is possible to determine what to expect in terms of a response to the offering, and plan accordingly.

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