Offering costs definition
/Offering costs are those expenditures made to pay for the accounting, legal and underwriting activities associated with the issuance of securities to investors. Other offering costs cover the printing of prospectuses, exchange listing fees, registration fees, and initial credit rating agency fees (if an offering involves the sale of bonds). Offering costs can be so substantial that they make it impossible for a smaller entity to issue securities.
Offering costs can vary dramatically, depending the size of the security issuance, the type and complexity of the offering, the regions in which the securities are being sold, and the ability of the issuer to drive down the fees charged. A large and frequent issuer of securities does enough business with underwriters to drive a harder bargain on fees than a smaller and more infrequent issuer.
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Example of Offering Costs
As an example of offering costs, a company is selling $100 million of securities through an initial public offering. It incurs the following offering costs as part of this issuance transaction:
Because of the multitude of offering costs, the company only nets $88.5 million from the offering. This breakdown shows how much of the offering proceeds are allocated to cover expenses and how much the company actually receives after these costs are deducted. The biggest portion of costs usually comes from underwriting fees, which compensate investment banks for managing the offering and selling the securities to investors.