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Thursday, July 26, 2012

What book runners do in investment banking

Book running is a beneficial service to businesses seeking capital
Book runners are primary underwriters of financial securities
Book running is a function of investment banking that coordinates the sale of new securities. In this sense a book runner is a securities underwriter; however the book runner is considered the primary facilitator of the underwriting of financial securities such as stock, convertible bonds, and bonds. A book runner does not have to be an individual, but also refers to a firm or corporation such as an investment bank per Reuters news agency.

Financial institutions that participate in book running

Goldman Sachs, Morgan Stanley and JP Morgan Chase are all book runners because they are investment banks that facilitate the capitalization of businesses. For example, in June 2011, the Internet Networking website LinkedIn became a public corporation. In becoming a public corporation new shares were issued by LinkedIn's securities underwriters. LinkedIn's lead underwriter or book runner was Morgan Stanley according to USA Today.

Regulation of book running 

Book running is regulated by the the Securities Act of 1933, and the Securities and Exchange Act of 1934 and the Investment Company Act of 1940 as amended in 2010. The particulars of securities underwriting, and hence book running are detailed in this act. For example, Section two, part 40 of the Investment Company Act defines 'underwriter' as any person who, for more than the price of commission, buys and sells securities from an issuer, or who sells securities for a securities issuer for purposes of distribution.

The book running undewriting process

In terms of the aforementioned definition, the primary underwriter is the book runner. Book runners must also be registered with the Securities and Exchange Commission SEC and are monitored by the Financial Industry Regulatory Authority. According to FINRA, individual securities dealers whose employing firms are FINRA members must also be registered  with the regulator. Book running or securities underwriting subsidiaries are listed at the Federal Reserve Bank website.

If a large initial public offering such as the one scheduled via a Form S-1 by Groupon, Inc. on June 2, 2011 with the Securities and Exchange Commission has multiple underwriters, there can also be more than one book runner. To illustrate, the SEC filing states Morgan Stanley, Credit Suisse and Goldman Sachs as the underwriters. However,  in July 2011 Groupon, Inc. filed an amendment to its original Form S-1. This amendment added 11 additional underwriters to work on the Groupon, Inc. IPO. Of these 11, one additional book runner was added, specifically J.P. Morgan.

In summary, book running is a financial colloquialism referring to the more formal term of lead underwriter that is a task performed within investment banks. Lead underwriters are the regulated financial institutions or investment banks responsible for selling and distributing financial securities for the purpose of capitalization. Capitalization itself is performed for a number of reasons including initial public offering as is the case with Groupon, Inc. Book runners are utilized for their experience, know how and capacity to raise capital for businesses and other organizational entities via financial markets.

Image: US-PDGov