What is Underwritten Public Offering?
617 reads · Last updated: December 5, 2024
Underwriting public offerings refers to the purchase of stocks or bonds of unlisted companies by underwriters or underwriting syndicates, who are responsible for selling them to investors. In underwriting public offerings, underwriters or underwriting syndicates usually sign underwriting agreements with the issuing company, specifying the purchase and sale price and quantity. After purchasing stocks or bonds, underwriters or underwriting syndicates will sell them to investors through a series of sales activities to help the company raise funds and promote the listing and trading of stocks or bonds. Underwriting public offerings usually require approval from securities regulatory authorities and may involve certain risks and costs.
Definition
An underwritten public offering involves an underwriter or underwriting syndicate purchasing shares or bonds from a company that is not yet publicly listed and then selling them to investors. In this model, the underwriter commits to buying all unsold securities, ensuring the issuing company raises the necessary funds.
Origin
The concept of underwriting originated in the 19th-century financial markets when banks and financial institutions began offering this service to help companies raise capital. As capital markets evolved, underwriting became a key method for modern securities issuance.
Categories and Features
Underwriting can be categorized into two main types: firm commitment underwriting and best efforts underwriting. Firm commitment underwriting means the underwriter agrees to purchase all unsold securities, while best efforts underwriting allows the underwriter to buy only a portion of the unsold securities. The main features of underwriting include the underwriter bearing higher risk, as they must purchase unsold securities, but they may also earn higher underwriting fees.
Case Studies
A typical case is Alibaba Group's initial public offering (IPO) in 2014, where underwriters like Goldman Sachs and Morgan Stanley used underwriting to help Alibaba raise $25 billion successfully. Another example is Facebook's IPO in 2012, where its underwriter, Morgan Stanley, also used underwriting to ensure the successful issuance of shares.
Common Issues
Common issues investors face in underwritten public offerings include the selection of underwriters, the level of underwriting fees, and the accurate assessment of market demand. A common misconception is that underwriting is always risk-free, but in reality, underwriters may face the risk of unsold securities if market demand is insufficient.
