Legal Definitions - gross spread

The gross spread refers to the difference between the price an investment bank or a syndicate of underwriters pays to an issuer for a new issue of securities (such as stocks or bonds) and the higher price at which they then sell those securities to the public. It represents the underwriting syndicate's profit margin before accounting for their own expenses related to the offering. This spread compensates the underwriters for their services, including advising the issuer, marketing the securities, and taking on the financial risk of selling the entire issue.

• Example 1: Initial Public Offering (IPO)

  A burgeoning electric vehicle startup, "ElectroDrive Motors," decides to raise capital by offering its shares to the public for the first time. An investment bank agrees to underwrite the IPO. The bank purchases 15 million shares directly from ElectroDrive Motors at a price of $14.50 per share. The bank then sells these shares to institutional and individual investors at the IPO price of $15.00 per share.

  In this scenario, the gross spread is $0.50 per share ($15.00 - $14.50). This $0.50 per share is the compensation the investment bank earns for managing the entire IPO process, including valuing the company, marketing the shares to potential investors, and assuming the risk of selling all the shares.

• Example 2: Corporate Bond Issuance

  A large utility company, "PowerGrid Solutions," needs to raise funds for infrastructure upgrades and decides to issue $500 million in new corporate bonds. A syndicate of investment banks agrees to underwrite this bond offering. The syndicate purchases the bonds from PowerGrid Solutions at a price of 99.25% of their par value (meaning $992.50 for a $1,000 bond). They then re-offer these bonds to investors at 100% of their par value ($1,000 per bond).

  Here, the gross spread is $7.50 per bond ($1,000 - $992.50). This $7.50 per bond represents the fee the underwriting syndicate receives for structuring the bond deal, finding buyers for the bonds, and facilitating the capital-raising process for PowerGrid Solutions.

• Example 3: Secondary Equity Offering

  An established retail chain, "MarketPlace Inc.," decides to issue an additional 10 million shares to fund an expansion into new markets. An investment bank is hired to underwrite this secondary offering. The bank purchases these new shares from MarketPlace Inc. at $24.70 per share. The bank then sells these shares to the public at the market price of $25.00 per share.

  The gross spread in this case is $0.30 per share ($25.00 - $24.70). This $0.30 per share is the compensation the investment bank receives for its services in distributing the additional shares, ensuring a smooth transaction, and managing the offering without significantly disrupting the existing share price.