Question

1. There is clear evidence that in the US, underwriters seem to be acting collusively to all demand an underwriter spread of 7% of gross proceeds, no matter the size of the offering. True or False?

2. In a primary firm commitment general cash offer, the underwriter buys shares from the issuing firm for a negotiated price and attempts to resell the shares to public market investors and a higher price, earing the spread between the offer price and the net price. True or False?

3. An initial public offering is the most common way for early-stage investors to harvest their investments. True or False?

Answer 1

1. There is clear evidence that in the US, underwriters seem to be acting collusively to all demand an underwriter spread of 7% of gross proceeds, no matter the size of the offering.

The U.S. IPO underwriting market is highly profitable. IPO gross spreads, most of which cluster at 7% of the proceeds, are high in both absolute terms and relative to those in other countries. In addition, returns on IPO stocks on the first day of trading (i.e. IPO underpricing) are even higher than the gross spreads, leaving much money on the table.

Hence, the above statement is True.

2. In a primary firm commitment general cash offer, the underwriter buys shares from the issuing firm for a negotiated price and attempts to resell the shares to public market investors and a higher price, earning the spread between the offer price and the net price.

In a firm commitment, an underwriter acts as a dealer and assumes responsibility for any unsold inventory. For taking on this risk through a firm commitment, the dealer profits from a negotiated spread between the purchase price from the issuer and the public offering price to the public. A firm commitment sale method contrasts with the best efforts and standby commitment basis. An underwriter selling securities on best efforts does not guarantee the full sale of an issue at the issuer's desired price and will not take in unsold inventory.

Hence, the above statement is False.

3. An initial public offering is the most common way for early-stage investors to harvest their investments.

One challenge of investing in IPOs is that the companies usually don't have a long history of disclosing their financial information and they don't have an established trading history, so analyzing them using conventional methods can be impossible. It can be quite hard to analyze the fundamentals and technicals of an IPO issuance.

Hence, the above statement is False.