You run a chain of scalp massage parlors. Your business has grown over the years, and now you're ready for an initial public offering: the sale of stock to the general public. To conduct the IPO, you hire an underwriter...a bank or investment firm that will manage the process of making your shares public.
You reach a standby underwriting agreement. This structure means that the underwriter will buy any shares it can’t sell in the IPO. So if the offering is for 3 million shares and the underwriter can only place 2.9 million with investors, it will buy the remaining 100,000 itself. The underwriter puts themselves on "standby" to jump in and purchase any remaining shares, guaranteeing that you'll sell all the stock you want to at the offering price.
Related or Semi-related Video
Finance: What is an Underwriter?82 Views
finance a la shmoop what is an underwriter Undertaker underwriter
taking your company public well then you need one of these guys and yeah if [Woman writing at a desk]
things go poorly well then you may need one of these guys but if things go well [Gravestone]
an underwriter will get to know your company audit your financials give their
Good Housekeeping Seal of Approval to the investment community with whom they
deal regularly and introduce you as part of their family selling a piece of your
company to that world you know hedge funds mutual funds private wealthy [List of benefits that come with an underwriter]
investors such that they are the you know financial wind beneath your wings [Skyscraper flying away]
for a brief moment in time the underwriter usually an investment bank
like the vaunted Goldman Sachs or Morgan Stanley or JP Morgan or UBS or Sumitomo
will actually themselves own whatever piece of your company you are bringing [Logos for the banks appearing]
public like if you're selling 18 million shares at 20 bucks the bank's our
underwriters take a new public will own all 18 million shares having paid you
$19.60 for them and then turning around five minutes later and selling them for
20 bucks to John Q invest or making 40 cents a share in spread or markup or in [Spread calculation shown]
this case 40 times 18 million or 7.2 million dollars just for the pleasure so
that's an underwriter and if they screw up well yeah and ironically the [Underwriter stamp]
announcement he'll see in the digital paper is usually in the shape of a
tombstone announcing everything why a tombstone well because it represents the
death of ambiguity or confusion in that company's former life as a private one [Gravestone for ambiguity]
The Undertaker's hopefully have far far away [The Undertaker running away with the word confusion]
Up Next
What is a managing underwriter, and what is the selling group?