DEFINITION of 'Reallowance'

In securities underwriting, the fee that the underwriting group pays to a securities firm that is not part of the syndicate, but that still sells shares in the offering. Reallowance is typically a percentage of the underwriting spread negotiated by the selling syndicate for the issue. It provides a monetary incentive for a broker-dealer that is not part of the syndicate to sell shares of the issue to its own client base.

BREAKING DOWN 'Reallowance'

The selling syndicate may be amenable to parting with a portion of the underwriting spread in the form of reallowance for large issues where investor demand is somewhat uncertain. For example, if the underwriting spread for an issue priced at $30 is $2.50, the reallowance may range from 50 cents to 75 cents, depending on investor demand for the issue and the difficulty in placing it.

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