' Daniela Sanchez | MTTLR

The Role of Underwriters in a World of Unicorns

What do WeWork, Lyft, and Smile Direct Club have in common? They are “tech companies,” their IPOs underperformed or didn’t happen at all, and they all hired JP Morgan as their underwriter.   What is an Underwriter? When a company is planning to go public, they typically enter into an agreement with an underwriter to help them prepare for the Initial Public Offering (“IPO”). The most common type of underwriting agreement is one in which the underwriter agrees to assume the risk of buying the entire inventory of stock issued in the IPO and sell it to the public at the IPO price. The underwriter serves as an intermediary between the company and investors.   The underwriter is also responsible for filing a Form S-1 registration statement with the U.S. Securities and Exchange Commission (“SEC”). The form outlines the business of the company, the planned use for the capital raised, the basics of the IPO, any material business dealings between the company and its directors or outside counsel, and any legal issues the company may have. While the SEC is reviewing the registration statement, the underwriter creates a preliminary prospectus to take on a roadshow. During the roadshow, the underwriter generates excitement for the IPO and tracks indications of interest from potential investors. A pricing recommendation (how many shares can be sold at what price) is then determined based on the level of demand for the stock.   If the pricing recommendation is acceptable to the company’s Board of Directors, an initial price for the offering is set and the IPO date is solidified. A final prospectus is created...