Undivided Account What It is How it Works
Contents
Undivided Account: What It is, How it Works
What Is an Undivided Account?
An undivided account is an initial public offering (IPO) with multiple underwriters, each responsible for selling any unsold shares. This means that each firm agrees to pick up the slack if other underwriters fail to sell their allocated shares.
Also known as an eastern account, this type of account has a variation called a western account.
Key Takeaways
- In an undivided or eastern account, each underwriter sells any shares that remain unsold by other members of the syndicate.
- Underwriters are the financial firms that manage the process of preparing the IPO, including establishing a price for the shares and selling them.
- In a western account, each underwriter is only responsible for selling their own share of the total.
- There are greater risks and potential rewards in an undivided account.
- The eastern account is the most common arrangement, allowing underwriters to share in profits with a small upfront commitment.
Understanding Undivided Accounts
When a company prepares to launch an IPO, it hands off the responsibility of selling its shares to underwriters. These financial firms manage the process of preparing the IPO, including establishing a price for the shares and selling them to first buyers, such as financial institutions and brokerages.
In an undivided or eastern account, one underwriter may be responsible for placing 15% of the issue, while others handle the rest. If the entire issue is not placed, the firm with 15% must help to place the remaining shares.
In a western account, each underwriter is only responsible for selling the percentage of shares assigned to them. The liability is divided among the underwriters based on the size of their share allotment.
Underwriting Accounts and Agreements
Underwriters in investment brokerages take on significant risk in managing new issues of bonds or stocks. They agree upfront to pay the issuer a certain amount regardless of the sale price.
To mitigate risk, many firms enter syndication agreements that distribute the risks and rewards. Most syndicates are administered by one participating firm, and the eastern account is the most common arrangement. The risks and rewards are greater compared to western accounts. Underwriters in an eastern account can share in profits while committing a relatively small amount of money in advance.
Terms of an Eastern Agreement
The agreement between underwriters may include a market-out clause, which relieves the underwriter of the purchase obligation in case of developments that impair the quality of the securities or adversely affect the issuer. However, this clause has limited application and does not apply to poor market conditions or over-pricing.
The terms are specified in the syndicate agreement, also known as the underwriting agreement. This agreement outlines the fee structure and the percentage of shares or bonds that each syndicate member commits to selling.
The syndicate manager can establish an underwriting on a western or eastern account basis. Types of underwriting agreements vary and include firm commitment agreement, best efforts agreement, mini-max agreement, all or none agreement, and standby agreement.