Principal underwriter: Overview, definition, and example
What is a principal underwriter?
A principal underwriter is a financial professional or firm responsible for managing the issuance of securities, such as stocks or bonds, in a public offering. The principal underwriter works with the issuing company to help determine the offering price, structure, and timing of the issuance. They play a key role in the process by underwriting the securities, which involves assuming the risk of buying the securities from the issuer and reselling them to investors, typically through an underwriting syndicate.
In some cases, the principal underwriter may also serve as the lead underwriter in a group of underwriters, coordinating the efforts of other firms involved in the offering. The principal underwriter ensures that the securities are marketed, sold, and distributed effectively to the public, while also ensuring regulatory compliance and minimizing financial risk for the issuer.
Why is a principal underwriter important?
The principal underwriter is important because they help facilitate the capital-raising process for companies by ensuring that securities are successfully issued and sold to investors. They serve as a bridge between the issuing company and the investors, managing the risks associated with the offering, ensuring that the pricing is appropriate, and helping to attract investors.
Their role is essential in determining the success of an offering by managing the timing, pricing, and distribution of securities. Additionally, the principal underwriter provides a level of assurance to the issuing company that the offering will meet the desired financial objectives.
Understanding principal underwriter through an example
Imagine a company, XYZ Corp., wants to go public through an initial public offering (IPO). The company hires a principal underwriter, ABC Investment Bank, to lead the offering. ABC Investment Bank works closely with XYZ Corp. to assess the company's financials, determine the appropriate price for the shares, and structure the offering.
ABC Investment Bank also assembles a syndicate of other underwriters to help distribute the shares to investors. Once the offering price is set, the underwriter agrees to purchase a portion of the shares from XYZ Corp. and then resell those shares to institutional and retail investors. The principal underwriter assumes the risk of selling the securities at the agreed-upon price and provides valuable services such as marketing and compliance throughout the IPO process.
Example of principal underwriter in a securities offering agreement
Here’s an example of how the role of a principal underwriter might be described in a securities offering agreement:
"The Issuer has appointed ABC Investment Bank as the Principal Underwriter for the public offering of its common stock. As the Principal Underwriter, ABC Investment Bank shall coordinate the efforts of the underwriting syndicate, determine the offering price, and assume responsibility for the sale and distribution of the securities in accordance with the terms of this Agreement. ABC Investment Bank will also advise the Issuer on regulatory compliance and assist in marketing the offering to potential investors."
Conclusion
A principal underwriter plays a critical role in the process of issuing securities, helping companies raise capital through public offerings. They manage the risks associated with underwriting, set the offering price, and coordinate the distribution of securities to investors. By doing so, the principal underwriter ensures that the offering is successful and compliant with regulations, ultimately benefiting both the issuing company and the investors. Understanding the principal underwriter's role is key for any business planning to enter the public markets or engage in capital-raising activities.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.