What is a Selling Group?

Malcolm Tatum

A selling group is a collective term used to describe various types of financial institutions that are involved in the sale of some type of new equity or debt option. An institution included in this group may or may not actually be participating in the consortium that is underwriting the effort. In many situations, the selling group is closed to only those institutions that are willing to underwrite the net issue and assume a portion of the risk associated with the investment opportunity.

Businessman with a briefcase
Businessman with a briefcase

When a selling group is closed to only those involved in the underwriting of a new issue, there is also the possibility that members of the group are not willing to allow competitors to participate in the issue. This is not only because those competitors are not carrying a portion of the risk associated with the new equity or debt, but also because group members have a great deal of confidence in the projected performance of the issue. By excluding those who are not willing to help underwrite the investment, members of the selling group are able to keep the rewards among themselves once the new investment does begin to turn a profit.

Situations exist in which a selling group will welcome the participation of entities that are not assuming a portion of the risk associated with the new investment opportunity. This is true when the plan is to sell some of the newly issued securities to these non-underwriting entities at a price that is higher than the prices extended to the underwriters, but still well below the anticipated market price that will be in effect when the investment is launched. When managed properly, this approach can make it possible to sell more shares of the security on the front end, while still providing the non-underwriting entities the chance to resell their allotments at a rate that is closer to the anticipated market price. As a result, everyone benefits from the activity.

A selling group often comes together for a specific investment project, but there are instances where the consortium of underwriters may choose to forge long-term relationships that make it possible to work together on other projects at a later date. If the group is structured to allow participation by non-underwriting entities, those institutions may vary from one project to the next, or remain connected with the core group of underwriters. It is not unusual for a selling group with this type of structure to extend invitations to non-underwriting entities to participate in a new venture before extending that opportunity to other entities that have not participated in the past.

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