8.5.1. The Underwriting Spread
The underwriting spread as a whole is sometimes referred to as the gross spread. The gross spread is often about 7% of total proceeds. While this is more of a guideline than a firm rule, a spread that is not “fair and reasonable” will likely result in FINRA blocking the UA from taking effect. (This FINRA review of the UA is described in more detail the next section.) The gross spread is typically divided into three primary components: the management fee, the underwriting fee, and the selling concession. The amount and source of a syndicate member’s compensation depends on its role in the syndicate. The most common arrangement is a 20/20/60 split as described in the following table.
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Typical Components of the Underwriting Spread |
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Fee Component |
Percentage of Spread |
Goes to |
|
Management Fee |
20% |
Lead underwriter and co-managers (if any) |
|
Underwriting Fee |
20% |
Underwriters on pro rata basis; deal expenses deducted from underwriting fee |
|
Selling Concession |
60% |
Underwriters and selling group members who sell shares to investors |
Example: The public offering price for Typical, Inc. is set at $20 per share, with a 7% gross spread and a 20/20/60 split. The gross spread is therefore $1.40 ($20 × 0.07). This makes the issuer’s proceeds $18.60 ($20 – $1.40). The management fee is $0.28 ($1.40 × 0.20), and so is the underwriting fee. The selling concession is $0.84 ($1.40 × 0.60).
The management fee, also called the managing underwriter’s fee, compensates the manager f