4. Choosing Your Investment Banker 26

The ability to help client companies with future offerings; and
A research department with the scope to enable it to analyze the client company, its competitors, the market, and the economy as a whole.
Generally speaking, underwriters come in three sizes: “major bracket” or “wire- house” firms with well-known names; a middle tier comprising mostly regional firms; and local firms. Not surprisingly, the size and scope of your company and of your offering will, in part, determine the size of the underwriter you enlist for your IPO.
Companies anticipating an IPO of $50 million or more and possessing the characteristics outlined in “Is Going Public Right for Your Company?” can readily enlist major-bracket underwriters. Regional firms often look for the same types of offerings, only they must be in excess of $20 million. Local firms are often associated with smaller, higher-risk, or specialty companies.
A good working relationship with your underwriter is key, regardless of the size of the firm you select. You must have the trust in and confidence of your underwriter to provide all the information you will need to execute your IPO successfully.
Of course, the professional relationship between you and your underwriter is mutually beneficial. Your underwriter earns money from your offering in a variety of ways. These include:
The discount or commission. This averages around seven percent but could be up to ten percent for more difficult or smaller offerings and down to five percent for larger or simpler offerings in a competitive market.
The right to underwrite future offerings of the company’s securities.
Non-accountable expense allowance. This standard practice allows underwriters to bill you an amount that may not exceed three percent of gross proceeds without itemizing or otherwise detailing reimbursable expenses.
Other compensation, such as warrants to purchase stock.
Overallotments, see After-market support (page 31).
While these items may seem to allow quite a few charges by your underwriter, maximum underwriters’ compensation — both direct and indirect — is regulated and reviewed for fairness by the NASD before the offering may proceed. Blue Sky laws also require a review of underwriters’ compensation by state examiners. Closely associated with the underwriter is the underwriter’s attorney, who ensures that the underwriter has completed their extensive “due diligence” in the issue. This attorney also will be very involved with the drafting sessions and will review
26
PricewaterhouseCoopers LLP Roadmap for an IPO

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