An underwriting syndicate is a group of investment banks that share the responsibility of marketing the shares of a company undergoing an initial public offering (IPO). Depending on the structure of the IPO, the underwriters are required to buy the shares from the company to sell to investors. Modern IPOs often involve larger number of shares worth a high dollar amount. Investment banks wish to share the risk with other participants. Thus, investment banks as members of the underwriting syndicate agree to share the risk and responsibility for the IPO.

The members of the underwriting syndicate often sign an agreement that sets forth the allotment of stock to each participant and the management fee, in addition to other rights and obligations. The lead underwriter is in charge of the syndicate and allocates shares to each member of the syndicate. The allocations may not be equal among the syndicate members. The lead underwriter also determines the timing for the offering, as well as the offering price. The lead underwriter deals with any regulatory issues with the Securities and Exchange Commission (SEC) or Financial Industry Regulatory Authority (FINRA).

For popular IPOs, there may be greater demand for shares from investors than there are shares available. In that case, the IPO is oversubscribed. This demand can only be met once the shares begin actively trading on the exchange. The pent-up demand may lead to large price swings during the first few days of trading. As such, there is significant risk associated with individual investors participating in IPOs, either receiving shares as the client of an investment bank, or buying and selling shares once they begin trading.

  1. What does the underwriter do in a new stock offering?

    Learn the role an underwriter plays for an initial public offering, and the steps an underwriter takes in preparing for an ... Read Answer >>
  2. Under what circumstances might a syndicated loan be arranged?

    Learn about the types of syndicated loans, why some lenders choose to establish or join a syndicate, and why some borrowers ... Read Answer >>
  3. Do underwriters make guarantees to sell an entire IPO issue?

    Underwriters represent the group of representatives from an investment bank whose main responsibility is to complete the ... Read Answer >>
  4. How risky is a syndicated loan for the lender?

    Read about risks associated with the syndicate loan market, including the problems of adverse selection and asymmetric information ... Read Answer >>
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