What Is an Undivided Account?
Let me explain what an undivided account is—it's also called an eastern account. This is an initial public offering (IPO) setup where multiple underwriters share the duty of selling any shares that remain unsold. Each firm steps in if others can't sell their allocated portions.
Key Takeaways
You should know that in an undivided or eastern account, every underwriter takes on responsibility for unsold shares from the whole syndicate. Underwriters are the financial firms handling the IPO from preparation to pricing and sales. In contrast, a western account limits each underwriter's liability to their own share. Risks and rewards are higher in undivided accounts, and they're the most common because you can join a consortium, share profits, and commit little money upfront.
Understanding Undivided Accounts
When a company gears up for an IPO of stocks or bonds, it delegates the marketing to one or more underwriters. These firms oversee everything from prep to setting prices and selling to big buyers like institutions and brokerages.
In an undivided account, say one underwriter handles 15% of the issue, and others the rest—if not all sells, that firm helps place the leftovers. But in a western account, you're only responsible for your assigned percentage, with liability divided by allotment size.
Underwriting Accounts and Agreements
Underwriters in brokerages face big risks with new issues of bonds or stocks—they commit to paying the issuer a set amount no matter the sale price.
To mitigate this, many form syndicates to spread risks and rewards. Most are run by one firm, and eastern accounts are standard. They come with bigger risks and rewards than western ones. If you participate in an eastern account via consortium, you get a profit share with small upfront cash.
Terms of an Eastern Agreement
Underwriters might add a market-out clause to escape buying if something damages the securities' quality or hurts the issuer—but it's limited; bad markets or overpricing don't count.
All terms are in the syndicate agreement, also known as the underwriting agreement. It covers fees, plus the percentage of shares or bonds each member must sell. The manager decides if it's western or eastern, and agreements vary: firm commitment, best efforts, mini-max, all or none, or standby.
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