Question

What is underwriting? Describe the underwriting process? Who assumes the risk? How is it different from private placement?

Answer 1

Underwriting is a common process when a company is planning to bring out an IPO i.e., Initial public offer. Underwriting activity generally involves investment bankers who guide the company about the type of securities to be issued , best offering price and no of shares to be issued. The underwriter also assumes risk on behalf of the company against fees to purchase certain % of shares in the event IPO does not subscribe fully.

Private placement offerings are different from IPO underwriting where only accredited investors and not the public at large is given an option (not obligation) to purchase shares. Accredited investors include investment banks, pension funds, mutual funds and high net worth individuals.