IPO University

When you purchase an IPO at the offer price, you pay no commission. Instead, the underwriter charges the issuing company a gross spread, which is the difference between the public offering price and what the issuing company received. Typically, this spread is 6% to 8% of the IPO's offering price, though it can be as low as 2% to 4% for large offerings. For Alibaba, the underwriters took home a 1.2% gross spread, which amounted to $261 million. The gross spread is composed of a management fee, an underwriting fee, and a selling concession, typically at a split of 20%/20%/60%. The profitability of doing IPOs is one important reason why investment banks focus on developing this business.