Selling Group

Selling Group Definition

A selling group refers to a group of underwriter syndicates, brokers, dealers, and investment firms that participate in the issue of new and secondary shares. The syndicate buys shares from the company and sells them to other members, who then sell them to investors.

The members of the selling group, including the syndicate, generate their profits through the process. They primarily engage in selling and marketing activities to ensure the successful sale of all the issued shares in the market. However, only syndicate underwriters of the group are primarily liable to the issuer for the unsold shares. They bear the liability for any shares that remain unsold.

• Selling groups facilitate the sale of shares during primary or secondary offerings. They consist of underwriters and broker-dealers who act as intermediaries between issuing companies and investors.
• Selling groups are crucial for ensuring the successful distribution of shares in the market and maximizing investor participation.
• The primary objective of this group is to buy shares from the issuing company and sell it to investors at a markup, thus making income through the margin, sales commissions, and brokerage fees.

Selling Group Explained

Selling group agreements are contractual arrangements between investment firms, stockbrokers, dealers, and underwriter syndicates. These agreements ensure the successful sale of all shares issued by a company by connecting the issuer with potential investors. They outline the terms of the contract, including a termination date, typically set at 30 days, and specify the sales commission involved.

Every issue involves at least one underwriter syndicate. Depending on the size of the issuance, multiple syndicates might be required. Of this, some might be senior syndicates overseeing the share issue. These syndicates are mostly investment firms such as Goldman Sachs, JP Morgan Chase, Wells Fargo, etc., who buy the shares from the issuing company.

The underwriter syndicates allocate some of these shares to other selling group members, applying a markup to the share price. The remaining shares are then sold to their respective clients. Subsequently, brokers and dealers increase the share price before selling it to investors. Therefore, these group members profit from the difference between the purchase and sales prices.

Once the shares are issued, the group members actively find investors. If they do not sell all the shares, the underwriter syndicates are held responsible, not the brokers and dealers. Similarly, if the issue is successful, the underwriter syndicates receive a huge chunk of the profits. The higher the risk undertaken, the higher the reward.

Not all groups include brokers and dealers. Some have a few underwriter syndicates under a senior syndicate. This group conducts all the activities, bears the entire risk, and earns all the rewards. Such an arrangement can give better deals to investors as an intermediary is eliminated.

Examples

Here are a few examples to understand the concept.

Example #1

An imaginary company issues 1000 shares at $15 each through its IPO. Its senior underwriter syndicate is P. Besides P, it has three other syndicates – Q, R, and S, to whom the company sold its shares at $13. P appoints five brokers to sell the company’s shares. P, Q, R, and S decide to hold 500 shares and sell them at $14 to the brokers and at $15 to their clients. The brokers then sell their shares to investors at $15.

Example #2

The State Street Corporation has partnered with four black-owned businesses to underwrite the issuance of their $1.25 billion unsecured debt. While Siebert Williams Shank & Co., LLC will be the senior syndicate, Blaylock Van LLC, Loop Capital Markets LLC, and CastleOak Securities, L.P., will be the other three black-owned syndicate firms. Besides these firms, other underwriters include Morgan Stanley & Co., LLC, Goldman Sachs & Co., LLC, and BofA Securities, Inc. The State Street Corporation is renowned for its inclusion, diversity, and equity efforts.

Benefits

Here’s why a selling group can be advantageous in the issue of shares.

• It ensures that shares are sold through a vast network of brokers and dealers. The group members are invested in finding traders for the shares. It is crucial in raising capital for the issuer.
• Underwriter syndicates make huge profits or additional breakdowns if the issue is successful. It motivates the syndicates to operate a well-established network of brokers and dealers.
• Since non-underwriter syndicates are not responsible for unsold shares, they are not penalized. Again, this encourages them to take up the issue of new shares and also find the best shares for their clients.
• The group helps manage demand and supply, especially during initial public offerings (IPO) and follow-on public offers (FPO).
• Brokers and dealers can even collect brokerage fees and commissions from investors once the shares are sold, thus ensuring income from two sources.

Limitations

Let’s examine a few demerits of selling groups.

• Underwriter syndicates in the group are liable for unsold shares. The issuing firm’s reputation can come in the way of the issue, no matter how successful the syndicates are and how good their network is.
• When an issue is successful, the underwriter syndicates make enormous profits compared to other group members, who make average profits.
• The activity does not add value to the non-syndicates if they cannot sell the shares to investors. It will be a waste of time and effort.
• These groups build the supply chain, connecting the issuing companies and investors lengthy. It consists of too many intermediaries who keep marking up, thus increasing customer costs.

Frequently Asked Questions (FAQs)

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