Appointment of underwriter: Overview, definition, and example
What is the appointment of underwriter?
The appointment of an underwriter refers to the formal selection of a financial institution or individual to assume the responsibility of managing and facilitating the issuance of securities (such as stocks or bonds) on behalf of an issuer, typically a company or government entity. The underwriter acts as an intermediary between the issuer and the investors, assisting with the pricing, marketing, and sale of the securities. The underwriter may also assume the risk of buying the securities from the issuer and reselling them to the public, a process known as underwriting.
In many cases, the underwriter is appointed through a contract or agreement, and the specific terms of the appointment, including the underwriter's fees and responsibilities, are outlined in the underwriting agreement.
Why is the appointment of an underwriter important?
The appointment of an underwriter is important because it ensures that the securities issuance process is managed by an experienced professional who understands market conditions, investor sentiment, and legal requirements. The underwriter plays a key role in determining the offering price, structuring the deal, and facilitating the marketing of the securities to potential investors.
For issuers, appointing a reputable underwriter helps ensure that their securities are priced appropriately and sold to the right investors, while also reducing the risk associated with the offering. For investors, the underwriter provides a level of credibility and assurance that the securities being offered have undergone proper due diligence and are likely to meet their investment criteria.
Understanding the appointment of underwriter through an example
Imagine a company, ABC Corp, that wants to raise capital by issuing shares of stock to the public. ABC Corp appoints a well-known investment bank as the underwriter for the initial public offering (IPO). The underwriter's role includes helping ABC Corp determine the price at which to offer the shares, marketing the offering to potential investors, and ultimately purchasing the shares from the company and reselling them to the public.
In another example, a local government entity is issuing municipal bonds to fund a new infrastructure project. The government appoints an underwriter to structure the bond issue, set the interest rate, and sell the bonds to institutional investors. The underwriter’s experience helps ensure that the bonds are sold at a fair price and that the project receives the necessary funding.
An example of an appointment of underwriter clause
Here’s how a clause like this might appear in an underwriting agreement:
“The Issuer hereby appoints [Underwriter Name] as the exclusive underwriter for the issuance of [X] number of shares of common stock in connection with the public offering. The Underwriter shall be responsible for pricing, marketing, and selling the shares to the public in accordance with the terms set forth in this Agreement.”
Conclusion
The appointment of an underwriter is a critical step in the process of issuing securities, whether for a company’s IPO, a government bond offering, or any other type of capital raising initiative. The underwriter plays a central role in determining pricing, managing risk, and facilitating the sale of securities to investors. For issuers, selecting the right underwriter helps ensure a successful offering and maximizes the capital raised, while for investors, it provides confidence in the legitimacy and due diligence of the securities being offered.
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.