Underwritten Public Offering

An investment bank guarantees the sale of a company's new shares by purchasing the entire inventory upfront to resell to the public.

An underwritten public offering is a method of raising capital where an investment bank, or a syndicate of banks, guarantees the sale of a company's newly issued securities. In this arrangement, the underwriters commit to purchasing the entire block of shares or bonds directly from the issuing company at a predetermined price. The underwriters then assume the financial risk of reselling these securities to institutional and retail investors in the public market. This structure provides the issuing company with absolute certainty regarding the amount of capital it will raise, as the financial risk of unsold inventory is transferred entirely to the underwriting banks. To compensate for this risk, underwriters purchase the shares at a discount to the expected public offering price, pocketing the difference—known as the underwriting spread—as their fee. For retail investors, underwritten offerings often create short-term downward pressure on the issuer's stock price. This occurs because the new shares are typically priced at a discount to the prevailing market price to stimulate demand, and because the influx of new shares dilutes the ownership percentage of existing shareholders. Investors analyze these transactions to gauge institutional demand and to assess whether the capital raised will be deployed into high-return growth initiatives or used merely to pay down expensive debt.

Company A wants to raise capital and enters into an underwritten public offering of 5,000,000 new shares. The investment bank agrees to buy all 5,000,000 shares upfront at a discounted price of $19.00 per share, guaranteeing Company A gross proceeds of $95,000,000 (5,000,000 shares $19.00). The bank then resells the shares to the public at the offering price of $20.00 per share, aiming to collect $100,000,000 and earn an underwriting spread of $1.00 per share, or $5,000,000 in total.