Selection of underwriters: Overview, definition, and example
What is selection of underwriters?
Selection of underwriters refers to the process by which a company or entity chooses financial institutions or professionals (called underwriters) to assist in the issuance of securities, such as stocks or bonds, to the public. Underwriters play a crucial role in the process, as they help determine the price at which securities will be sold, market the securities to investors, and, in some cases, purchase the securities themselves to ensure that the offering is fully subscribed.
The selection of underwriters is an important step in the process of raising capital, as underwriters help manage the risks associated with the offering, ensure regulatory compliance, and provide expertise in structuring and pricing the offering. In many cases, underwriters are investment banks, brokerage firms, or other financial institutions with experience in securities offerings.
Why is selection of underwriters important?
The selection of underwriters is important because the choice of underwriters can significantly impact the success of a securities offering. A well-chosen underwriter or group of underwriters will have the expertise and reputation necessary to effectively market the offering, attract investors, and manage any risks involved in the transaction.
Underwriters also help set the right price for the securities, ensuring that they are attractive to investors while still allowing the company to raise the necessary capital. Additionally, underwriters often provide advice on market conditions, regulatory compliance, and the overall strategy for the offering, making their selection a key element in the decision-making process for any company considering issuing securities.
Understanding selection of underwriters through an example
Imagine a company, Company A, decides to go public by issuing shares in an initial public offering (IPO). As part of the IPO process, Company A needs to select underwriters to help with the sale of its shares. Company A interviews several investment banks and chooses Investment Bank B because of its strong track record in managing IPOs, its reputation with institutional investors, and its global reach. Investment Bank B works with Company A to determine the price range for the shares, markets the shares to potential investors, and ensures the IPO is successful.
In another example, Company C is issuing bonds to raise capital for an expansion project. Company C selects a group of underwriters, including investment banks and bond rating agencies, to help structure the bond issuance, set the bond terms, and ensure that the bonds are appropriately priced and marketed to potential investors.
An example of selection of underwriters clause
Here’s how a selection of underwriters clause might appear in a securities offering agreement:
“The Company shall select one or more underwriters to manage the offering of its securities. The selection of the underwriters shall be based on their experience, expertise, and reputation in the market. The underwriters shall be responsible for determining the pricing of the securities, marketing the securities to potential investors, and assisting with the regulatory filings required for the offering. The Company agrees to compensate the underwriters in accordance with the terms outlined in the underwriting agreement.”
Conclusion
The selection of underwriters is a critical part of the securities issuance process, ensuring that a company or entity has the right expertise and resources to successfully issue and sell securities. The underwriters play a key role in determining the price, marketing the offering, and managing the risks involved. By selecting reputable and experienced underwriters, companies can increase the likelihood of a successful offering that meets their financial goals and attracts investors.
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.