Definition
Securities underwriting refers to the process where securities firms assist companies in issuing new stocks or bonds and help them raise funds. Underwriters help determine pricing, sales strategy, and even bear the risk of unsold securities.
Main Functions
- Assist companies in raising capital
- Enhance corporate visibility
- Promote the development and liquidity of the capital market
Firm Commitment
The underwriter purchases all newly issued securities outright. This carries higher risk but ensures the company receives full funding.
Best Efforts
The underwriter only assists in selling securities and does not guarantee that all will be sold. Unsold portions are borne by the issuing company.
Stand-by Underwriting
Commonly used in cash capital increases, the underwriter agrees to purchase any unsubscribed shares after public offering.
Signing the Underwriting Agreement
The issuer and the underwriter agree on cooperation terms and responsibilities.
Due Diligence
The underwriter conducts an in-depth review of the company’s finances, operations, and risks to ensure complete disclosure.
Setting Issuance Conditions
Including price, quantity, and issuance schedule.
Investor Roadshow
Presenting the company and issuance plan to potential investors to attract interest.
Subscription Period
Investors place orders; the underwriter coordinates and allocates shares.
Listing or Official Issuance
After completion, the company receives the raised funds.
Item
Taiwan
United States
Underwriting Type
Primarily stand-by
Primarily firm commitment
Price Determination
Public offering, regulatory approval
Market demand pricing
Investor Structure
High retail investor ratio
Predominantly institutional investors
Regulation Level
Strict regulations
High level of liberalization
Green Shoe Option
Common (especially large IPOs)
Widely used
Preparation and Evaluation
- Review corporate governance and financial structure
- Negotiate with lead underwriter
Document Preparation
- Prepare audit reports, financial statements, legal opinions
- Organize listing application documents
Regulatory Review
- Submit to the Financial Supervisory Commission or stock exchange
- Respond to feedback and revise documents
The preparation phase is critical and often takes 6-12 months of intensive work before public announcement.
Market Promotion (Roadshow)
Communicate with potential institutional and retail investors
Collect market demand (Book Building)
Pricing and Allocation
Determine price based on demand and market conditions
Decide allocation ratio between retail and institutional investors
Listing
Officially start trading
Funds raised enter secondary market circulation
Cost Components
- Basic expenses: due diligence, legal advisory, audit fees
- Underwriting commission: around 2%–5% in Taiwan; 5%–7% in the US
- Marketing and administrative expenses: roadshows, promotional activities, etc.
Example Calculation
Assuming a total issuance of NT$2 billion, with an underwriting fee of 3%:
NT$2 billion ×3% = NT$60 million
Taiwan Market Characteristics
- Emphasizes regulation and retail investor protection
- Pricing often subject to review and public offering mechanisms
- Higher proportion of individual investors
- Stand-by underwriting more common
US Market Characteristics
- Highly liberalized market structure
- Pricing driven primarily by market demand
- Dominated by institutional investors
- Firm commitment underwriting prevalent
- Higher underwriting fees (5-7%)
Underwriting is Critical for Capital Markets
Securities underwriting serves as a vital bridge between companies seeking capital and investors looking for opportunities, enhancing market liquidity and corporate development.
Different Models Serve Different Needs
Firm commitment, best efforts, and stand-by underwriting each serve different risk profiles and market conditions.
Market Structure Influences Process
Taiwan’s regulated market with retail focus contrasts with the US’s institutional-dominated, liberalized approach, affecting pricing, allocation, and fee structures.
IPO Process Requires Extensive Preparation
Successful public offerings demand months of preparation, documentation, regulatory compliance, and strategic marketing to investors.