What it means
When a company issues shares or bonds, an investment bank, called the lead underwriter, usually manages the deal. The lead may form a syndicate of other banks that share the risk of buying the securities from the issuer and reselling them.
To reach even more investors, the syndicate can invite additional firms to join a selling group. Members of the selling group do not commit their own money to buy the whole issue.
They agree only to sell the amount of securities they are allotted, and they can return unsold securities. This means they bear very little risk compared with the syndicate members.
The gross spread, which is the difference between the price paid by investors and the price paid to the issuer, is divided into parts. The management fee goes to the lead bank, the underwriting fee goes to the syndicate for taking the risk, and the selling concession goes to whoever sells the securities.
Selling group members receive only the selling concession. The selling group matters because it increases distribution.
A regional brokerage with strong relationships with local investors can bring buyers that the big banks might not reach. This helps the issuer to obtain a wider shareholder base and a better price, because more buyers competing for the same shares can support demand.
For issuers and managers, the structure explains how a new issue gets sold and why fees are layered. It also helps in reading prospectuses, which describe the underwriting arrangements.
If a deal is large, knowing who sits in which group clarifies who bears risk and who earns what. Recent practice has changed some of the detail.
Many large deals are now sold mainly through the lead banks and a small syndicate, and electronic platforms allow orders to be collected from a wide range of investors. The selling group idea is still useful for understanding how new issues are distributed.
In practice
Real-world examples.
Example
A large bank leads a $500,000,000 bond offering and invites 30 regional brokerages to join the selling group. Each firm sells to its own clients and earns a concession on its sales. The bonds reach many more investors than the lead bank could manage alone.
Example
A small brokerage with a strong base of retail investors joins a selling group for a utility company's share sale. It is allotted 50,000 shares and sells 40,000 to clients. It earns the concession on the 40,000 sold and returns the remaining 10,000.
Example
A technology company floats on an exchange, and the lead underwriters want shares to reach individual investors. They add online brokerages to the selling group. These firms offer shares to their customers, and each firm earns a concession on every share its customers buy.
Formula
Calculation
Selling concession earned = shares sold x concession per share
A company sells shares at $20 each, with a gross spread of $1.00 per share. The spread is split into a management fee of $0.20, an underwriting fee of $0.20 and a selling concession of $0.60. A selling group member sells 100,000 shares and earns 100,000 x $0.60 = $60,000. The total gross spread on those 100,000 shares is 100,000 x $1.00 = $100,000.Case study
Seen in the real world.
Marlowe Foods is a fictional company issuing 5,000,000 new shares at $20 each to raise $100,000,000. The lead underwriter, Castellan Securities, formed a syndicate of six banks and a selling group of twenty smaller brokerages.
The selling group reached investors in many small towns who would not usually participate in a deal of this size. This is an illustrative story, but it shows the point of the structure. The shares were fully sold within three days, and Marlowe's chief financial officer, Daniel, was pleased with the broad base of holders.
One selling group member sold 80,000 shares and earned a concession of $0.60 per share, a total of $48,000. Another member sold only half of its allocation, returned the rest and earned a smaller amount.
Watch out
Common mistakes.
- Assuming selling group members share the underwriting risk. They do not buy the issue themselves, and unsold securities can be returned.
- Confusing the selling group with the underwriting syndicate. The syndicate takes the risk, while the selling group only helps with distribution.
- Thinking the issuer pays no fees. The gross spread is a cost to the issuer, shared among the lead manager, the syndicate and the sellers.
Questions
People also ask.
What is a selling group?
It is a group of brokerage firms recruited to help sell a new issue without underwriting it.
How is a selling group paid?
It earns the selling concession, which is a portion of the gross spread on each security sold.
Why use a selling group?
It broadens distribution and brings the securities to more investors, which helps the issuer sell the issue quickly.
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