Moreover, in a firm commitment (underwritten) offering the underwriter guarantees the sale of a specified number of shares at a designated offer price, thereby guaranteeing the issuing firm a set level of proceeds. As such, the risk of sale is transferred from the issuer to the underwriter.
To reduce the risk borne by a single investment firm, a syndicate of underwriters is typically formed—the size of which is highly correlated to the anticipated level of offering proceeds.
The head of the syndicate is the lead underwriter and is the entity that retains primary responsibility for the legal and administrative aspects of the offering. Syndicate members principally act as an additional layer of intermediaries for distributing the issue to the public.
Since the lead underwriter maintains control and possesses the greatest level of responsibility, its reputation is highly important in determining the acceptance of the issue by the public. For example, the reputation of the lead underwriter represents a certification signal that may be used by potential investors to judge the quality of the issuing firm.