Gross Spread

Gross Spread — What it Is and How It Works

The gross spread (also called gross underwriting spread or simply the spread) is the difference between the price an issuing company receives from underwriters in an initial public offering (IPO) and the price at which those shares are sold to the public. It represents the underwriters’ compensation for arranging and distributing the offering.

Key points

• Gross spread is the underwriter’s profit on an IPO.
• It funds underwriting and distribution activities (management fees, underwriting fees, sales concessions) plus legal, accounting, and registration expenses.
• The spread and its internal allocation vary with deal size, risk, market conditions, and the composition of the underwriting syndicate.
• Typical gross spread ratios often range from roughly 3% to 7% of the public offering price, depending on market and deal characteristics.

How the IPO process creates a gross spread

1. The issuer hires one or more investment banks to underwrite the offering and help determine the offering size and structure.
2. The issuer and underwriters register the offering with the securities regulator.
3. The investment bank(s) buy the shares from the issuer (the underwriting price) and resell them to investors (the public offering price).
4. The difference between resale price and the underwriting price is the gross spread.

What the gross spread covers and how it’s allocated

Funds from the gross spread typically cover:
* Manager’s (lead underwriter’s) fee.
* Underwriting fee distributed among syndicate members.
* Selling concession paid to broker-dealers who sell the shares.
* Legal, accounting, and registration costs.

Allocation details:
* The lead manager is entitled to the overall spread; syndicate members receive portions of the underwriting fee and concessions (not necessarily equal).
* Broker-dealers that are not syndicate members but sell shares receive only the selling concession; the syndicate member that supplied the shares retains the underwriting fee.
* As total spread size grows, the proportion of the spread allocated to concessions (sales effort) tends to increase, while the fixed components (management and underwriting fees) decline proportionally due to economies of scale.

Example and gross spread ratio

If an issuer receives $36 per share from underwriters and the public offering price is $38 per share:
* Gross spread = $38 − $36 = $2 per share.
* Gross spread ratio = $2 / $38 ≈ 5.26%.

A higher gross spread ratio means a larger share of IPO proceeds goes to the underwriter.

Factors that influence gross spread

• Deal size — larger deals often have lower proportional fixed fees but may require larger sales effort (higher concessions).
• Perceived risk of the issuer — higher risk can increase the spread.
• Market volatility and demand — uncertain markets or weak demand can widen the spread.
• Geographic and regulatory differences — spreads vary by country and market practice.

Takeaway

The gross spread is the primary source of underwriter compensation in an IPO and reflects both the cost of arranging the offering and the incentives for selling shares. Investors and issuers should consider how deal size, risk, and syndicate structure affect both the spread and how much capital from the offering will reach the issuer.