Risk warning: Trading CFDs and FX carries significant risk and is not suitable for everyone. You have no ownership of the underlying asset. Pepperstone Financial Services (DIFC) Limited is regulated by the DFSA. Arranging for Pepperstone Group Limited, AFSL 414530, the product issuer.
Pepperstone logo
Pepperstone logo

Learn to trade

Beginner

Why a company needs an underwriter

Without an underwriter, there is the possibility that the company will not be able to gather enough interest in its shares to raise the desired capital amount. It may fall short or not get any traction at all. The underwriter is essentially the salesmen of the IPO, and they help to find the right investors for the company. Without an underwriter, an IPO can be doomed to fail from the outset.

The underwriter(s) may purchase all of the shares from the company at a set price (so that the company raises exactly the amount they are seeking), and if the underwriter can sell the shares above and beyond that price, they pocket this as their fee. This is a fully underwritten IPO. It gives the company certainty that they will raise the amount required, and is generally a sign that the underwriter is confident they can sell any remaining shares at a profit in the secondary market when required.

In some cases the underwriter may partially underwrite the issue, where they purchase only a portion of the shares on offer to sell and the rest are left for the market to determine if they are interested.

But in many cases the underwriter(s) will engage with the company on a “best efforts” basis, whereby they agree to sell as many shares as possible but don’t purchase any remaining shares where the IPO is undersubscribed (receives less interest than anticipated and shares remain unallocated). The underwriter receives a portion of the sale price for every share sold, so it’s in their best interests to sell as much of the offer as they can.

There’s also the matter of listing documentation and regulatory filings that companies need to collate and present, and underwriters handle this process for them.

Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information provided here, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.