Selling Syndicate
A selling syndicate is a group of investment banks and broker-dealers that work together to sell and distribute a new issue of securities to the public, typically in the context of an initial public offering (IPO) or a bond issuance. The syndicate is formed to manage the risks associated with underwriting a large financial transaction and to access a broader base of investors than any single member could achieve on its own.
When a company decides to go public or issue bonds, it often partners with an investment bank to facilitate the process. Given the size and complexity of these offerings, the lead investment bank (often termed the “lead underwriter” or “book runner”) might form a syndicate with other banks and financial institutions to spread the risk and leverage their combined distribution networks.
Here’s how a selling syndicate generally functions:
- Formation of Syndicate: The lead underwriter forms the syndicate by inviting other financial institutions to participate.
- Agreement: Members of the syndicate agree on terms and roles, which are outlined in a document known as the “underwriting agreement.”
- Allocation : The lead underwriter allocates a portion of the securities to each member of the syndicate based on their agreement.
- Distribution: Syndicate members then sell their allocated shares or bonds to their clients and to the public.
- Risk Sharing: The syndicate members collectively assume the risk. If the securities are not fully sold, the syndicate members must absorb the unsold portion according to their agreement.
Typically, the syndicate will dissolve once the offering has been completed, and the securities have been fully distributed.
The advantages of a selling syndicate include risk diversification, access to a wider investor base, and pooling of expertise and resources from multiple financial institutions.
Example of a Selling Syndicate
Let’s consider a fictional scenario to illustrate how a selling syndicate operates.
TechPulse Inc. is an innovative technology company specializing in AI solutions. The company has grown rapidly and is looking to raise capital to fund its expansion plans. After careful consideration, they decide to go public and conduct an Initial Public Offering (IPO) to raise $200 million.
TechPulse’s IPO Journey with a Selling Syndicate:
- Lead Underwriter Selection: TechPulse selects BankOne as its lead underwriter after several discussions and pitches from various investment banks.
- Formation of the Syndicate: Recognizing the massive interest in TechPulse’s offering and the potential size of the IPO, BankOne forms a syndicate to help manage the process and distribute the shares. They invite two other investment banks, CapitalCorp and FinTech Partners, to join the syndicate.
- Agreement: The three banks formalize their collaboration through an underwriting agreement. They determine the responsibilities of each member, fees, and how the shares will be allocated among them.
- Allocation: BankOne decides to retain 60% of the shares for distribution (given their larger client base and primary role in the offering). They allocate 25% to CapitalCorp and 15% to FinTech Partners.
- Pricing and Distribution : The IPO price is set at $20 per share, aiming to sell 10 million shares to raise the targeted $200 million. The syndicate members begin marketing the offering, conducting roadshows, and eventually selling the shares to their respective clients and the broader market.
- Completion: The offering is a success, with all 10 million shares sold. BankOne distributes 6 million shares, CapitalCorp 2.5 million shares, and FinTech Partners 1.5 million shares.
- Dissolution of Syndicate: After the successful completion of the IPO and distribution of all shares, the selling syndicate dissolves.
Following the IPO, TechPulse Inc. is now a publicly-traded company with fresh capital to pursue its growth initiatives. The selling syndicate, consisting of BankOne, CapitalCorp, and FinTech Partners, played a pivotal role in making this transition smooth and successful for TechPulse.
