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Underwriting

The sponsor generally underwrites the issue. In return for a fee, underwriters guarantee to buy any shares not taken up by the market. This is a kind of insurance for the company – come what may, it will raise the money it needs to fulfil its strategic objectives.

The sponsor generally charges a fee of 2–4% of the issue proceeds and then pays part of that fee, say, 1.25–3.0%, to sub-underwriters (usually large financial institutions) who each agree to buy a certain number of shares if called on to do so. In the vast majority of cases the underwriters do not have to purchase any shares and so walk away with thousands or millions of pounds in fees. However, there are occasional flops when they are forced to buy shares no one else wants, ...