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Underwriting groups are a collection of bankers who have come together for the express purpose of participating in a new issue of securities. Generally, an underwriting group is formed under the direction of an originating investment bank or banker. All bankers who choose to participate in the group covenant to purchase a specified amount of shares and then resell them at the public offering price that is established by the members of the group.
There are several advantages for the corporation that arranges to launch a new offering through the auspices of an underwriting group. One of the main benefits is the broad distribution network that the group can provide. Functioning first as a purchase group and then a resell group, the bankers who are part of the underwriting group can provide a wider investor base than only one or two underwriters could manage. This means an enhanced opportunity for the initial public offering to generate a lot of attention and result in the quick sale of the shares purchased by the underwriters.
For the investment banks that choose to participate in this underwriting venture, there is also the opportunity to combine their resources and ensure that the launch of the new security is profitable for not only the issuing corporation, but also for the underwriters. Drawing on their collective resources, the bankers in the group can provide a higher visibility for the new offering, and set a purchase price for the initial offering that will be to the benefit of all involved.
As part of the terms of the agreement between the underwriting group and the corporation issuing the new security, the number and price of the shares purchased by the group will be defined. At the same time, all concerned parties will agree on the initial public offering price. It is not unusual for a timeline and list of action items to be outlined in the agreement as well. This helps both the corporation and the members of the underwriting group to know exactly what actions each party will handle before, during and after the launch.
Many underwriting groups choose to function with a format that is known as a divided syndicate. Essentially, this format helps to limit the liability associated with the venture to the amount of resources provided by each member of the group. Group members who contribute larger amounts of resources will incur more liability, but also will realize a higher rate of return for their efforts.