This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
The practice of underwriting security issues has been referred to from time to time in previous chapters. It has been assumed that, every reader is acquainted in a general way with the meaning of the term, but a more detailed discussion is presented in the present chapter.
The practice of underwriting arose in connection with shipping ventures during the seventeenth century. The leading ship merchants of London were accustomed to assembling in Lloyd's Coffee House to transact their mutual business. In the course of time, the custom arose of dividing the risk of venturesome voyages among a number of different merchants, each one agreeing to stand a fixed share of the loss or to receive a proportionate share of the profits. The contract to this effect was passed about and each merchant who agreed to it wrote his name under the contract - hence the word "underwriting." As is well known, the term is used chiefly in relation to the distribution of insurance risks; though when applied to bond and share issues the essential thought is the same, namely that of distributing the risk.
Perhaps it would be more correct to say that the underwriting contract generally relieves the corporation which issues the security of all risk. As will be explained a little later, there are a number of different types of underwriting agreements, but they all possess the feature that a banking house or a group of banking houses undertakes that the corporation receive not less than an agreed sum for the whole issue within a fixed period. The underwriters obligate themselves to take over the issue themselves in case it cannot be sold to the public above the agreed price.