Section: 3 Initial Public Offerings (IPOs)

Sub Section: 3 Spread

The underwriters and dealers get paid out of the proceeds of the issue offering. The public offering price is what the general public pays. This is the amount on the face of the prospectus. However, the issuing corporation receives a lower price than that from the managing underwriter. The difference between these two prices is the Spread. Any firm participating in the underwriting is compensated out of the spread. The amount of the spread is determined through a negotiation between the managing underwriter and the corporate issuer. However, at times there are certain parameters that are known to have taken place in previous underwriting and the negotiations take place around those. All members of the syndicate are paid out of the spread. The managing underwriter receives a fixed amount, called the managers fee, for each share that is sold. In addition, each member of the underwriting syndicate also keeps a portion of the spread, referred to as the underwriting or syndicate allowance. This compensates each member of the underwriting syndicate for their expenses and the risk they incur. The selling group that sells the securities is also allocated a portion of the spread known as the selling concession.

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