UNDERWRITER. In ordinary usage, a per son who is authorized to negotiate insurance con tracts. In modern financial practice a peculiar form of insurance has arisen to which the term underwriting is applied. It has been resorted to for many years in marketing new securities for established corporations, hut has reached its high est development in the financing of the large in dustrial corporations recently formed. When a ]arge•co•poration is organized to absorb a number of existing companies it is usually necessary to raise a large sum of money to serve as a work ing capital or to be employed in the purchase of stock in the original companies which holders are unwilling to exchange for new securities. To raise this cash the services of an underwriter are usually secured. The underwriting contract is one by which the company is assured of a definite amount of capital within a stated time. The underwriter binds himself to take at some stated future time a stipulated part of the securi ties of the new company at a price named in the contract, unless such a part is sold before that time at as high a price. He usually further agrees to advance at once the capital needed to launch the company. The underwriter leaves a wide margin between the price at which he agrees to take the stock and the price at which he hopes to sell it. A part of his reward comes from this source. He sometimes exacts in addition a bonus
of stock for himself, or a commission on all stock sold, and occasionally stipulates that none of the stock given to others shall be put on the market until he has disposed of the entire amount that he has underwritten.
The securities of a corporation of any magni tude are seldom underwritten by a single person or firm. The original underwriter usually allows other bankers or favored customers to share in the underwriting. The group is known as an underwriting syndicate. The original under writer usually acts as syndicate manager. Each member of the syndicate subscribes for a part of the stock. The cash that has to be raised to carry out the agreement with the company is secured by the syndicate manager partly through an assessment pro rata upon the members of the syndicate, partly by borrowing on the security of the underwriting. At the expiration of the time limit the syndicate manager distributes the profit of the transaction pro rata among the members, if the specified amount of stock has been sold. 11 some of it still remains unsold, whatever profit has been realized is distributed, and each mem ber of the syndicate is called upon to take his proportionate share of the unsold stock at the stipulated price.