What is a lead underwriter?

A lead underwriter is an investment bank or other financial institution that plays a vital role in helping companies to market new share offerings.

According to the lead underwriter definition, the investment bank or financial institution will lead a syndicate of investment banks to help companies to list new securities, whether through an initial public offering (IPO) or a secondary offering.

The lead underwriter is in charge of determining the initial value and number of shares to be sold, based on the company’s financials and current market conditions.

How does the lead underwriter work?

When a company wants to issue bonds, launch an IPO, or other publicly traded securities, it hires an underwriter. The underwriter will oversee the lengthy and complex process of issuing new securities.

The underwriter initiates the offering process, and the company – as the issuer – determines the type of offering. After determining the type of offering, the underwriter will form a syndicate to help manage the risks, especially if the offering is large.

A syndicate is made up of other investment banks and brokerage firms that act as the ‘sales force’ for the offering, selling a certain percentage of the securities. 

The lead underwriter is responsible for a variety of tasks, including preparing a prospectus that discloses all the information about the issuer. The prospectus contains information such as the issuer’s business structure, the names and addresses of the company’s executives, the ownership positions of each executive, an explanation of how the proceeds from the offering will be used, and a description of any legal proceedings in which the issuer is involved.

When the prospectus is finished, it is submitted to the country’s financial regulator – the Securities and Exchange Commission (SEC) in the US. Following that, the lead underwriter will begin the preliminary steps for the actual offering, including arranging for roadshows. 

At the roadshows, the company’s executives – usually the CEO and CFO – can make presentations about their business and the offering plan to attract public interest. Potential investors get a chance to ask questions about the planned offering to the management. Meanwhile, the underwriters can assess the interest from potential buyers. 

However, one of the lead underwriter’s most important responsibilities is determining the final offering price. The price determines the amount of proceeds received by the issuer. Furthermore, it determines how easily the underwriter will be able to sell the securities to buyers. 

When the lead underwriter and the issuer determine the offer price and SEC makes the registration statement effective, the underwriters will ask subscribers to confirm their orders. 

Lead underwriter example 

The lead underwriter for an IPO also acts as a go-between for the company/issuer and potential investors.

The lead underwriters take on significant risk. Any company could plunge in the open market once trading starts. That’s why large investment banks, including Goldman Sachs (GS) and Morgan Stanley (MS), serve as underwriters in several different offerings per year. 

They must not only advise a client on large and minor issues throughout the process. They also help alleviate the issuer of the risk of trying to sell all of the shares at the offer price.

They will receive a spread for such risks, which is the difference between what the issuer receives per share and what the underwriter sells the shares for. 

Company A, for example, set an IPO price of $11 per share. It may only receive $10 per share if the underwriters charge a $1-per-share fee. The spread is shared by the lead underwriter and the syndicate, but the lead underwriter receives the lion’s share of the $1.