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IPO Service Information: What Are Underwriters and How Are They Involved in The IPO Process?


Everyone knows that, in order to get an appropriate valuation for a stock and introduce it effectively into portfolios around the world, most new public companies will work with an investment bank or two that specializes in IPO services. Although these functions are very important, they are not the only functions that an underwriter -- the bank or group of banks -- takes on when the agreement to back an IPO is reached. The underwriter must also take on a great deal of the risk for the IPO process, sharing it with the new public company, in order to strengthen the operational bond between the companies and ensure that everyone's stake is well-represented.

The underwriter is an investment bank or coalition of financial institutions that act as IPO service providers on behalf of a company that seeks to go public. The underwriter orchestrates the public company's introduction to the investing public and vice-versa. This starts with a meeting between the company and bank executives to work out details including the amount of money the company is hoping to raise and the securities that will be associated with it. The result can come in the form of a "firm commitment" or "best efforts" contract.

In a "firm commitment," which is what most people will think about when they consider an Initial Public Offering, the underwriter ensures that some percentage of the fundraising goal will be achieved -- by buying the whole amount of securities and then reselling them to the public. Under a "best efforts" system, the underwriter steps in to sell the securities but does not guarantee the final amount raised. Because no bank wants to go it alone when significant risk is involved, one large bank will tend to work semi-independently to form a "syndicate" of banks. In this way, the risk is diluted but the agreement between the original bank and the public company is still solid.

In theory, a public company could sell stocks directly to the public once it has been cleared to trade in the stock exchanges. However, this simply is not done in modern trading. Having a well experienced IPO service provider makes the prospect less risky and more profitable for all.

If you would like more information on IPO services please contact us.

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