What does a reallowance refer to in finance?

Reallowance in finance specifically refers to the practice of compensating members of the selling group for their efforts in selling shares, particularly in the context of a public offering. When securities are sold in an offering, the lead underwriter may allocate a portion of the proceeds to the selling group members, known as reallowance. This additional fee acts as an incentive for these brokers to promote and sell the shares vigorously.

The structure encourages a wider distribution of shares and maximizes the chances of a successful offering by ensuring that those in the selling group are suitably rewarded for their participation. It is particularly relevant in underwriting agreements where the lead underwriter wants to encourage multiple firms to participate in the sale, thus broadening the potential investor base.

This understanding is crucial for investment bankers and discusses the dynamics of compensation in public offerings. Other options, such as penalties for late trading or discounts during an IPO, do not accurately describe the concept of reallowance.